Financial News on September 28th on the shore and offshore RMB exchange rates against the US dollar both fell below the 7.2 mark! Just now, the offshore RMB fell below the 7.25 mark against the US dollar again, falling more than 700 points in the day; the onshore RMB was now at 7.2385 against the US dollar, falling more than 600 points in the day. Data shows that this is the first time that the onshore RMB has fallen below the 7.2 mark since February 2008. The RMB mid-price against the US dollar released this morning was 7.1107, down 385 points, hitting a new low since June 2, 2020.
Central Bank consecutive moves
On September 26, the central bank announced that in order to stabilize foreign exchange market expectations and strengthen macro-prudential management of , the central bank decided to increase the foreign exchange risk reserve ratio of forward foreign exchange sales business from 0 to 20% from September 28.
The so-called forward foreign exchange sales business is to expect the depreciation of the RMB in the future, so locks the exchange rate in advance, and settles at the current exchange rate at the agreed time in the future, which can avoid the risk of shrinkage brought by the depreciation of the RMB on assets.
forward foreign exchange sales risk reserves were a new tool created by the central bank after the exchange rate reform in 2015. At that time, the RMB showed a clear unilateral trend due to exchange rate reform in . The central bank then charged foreign exchange risk reserves to banks that carry out forward foreign exchange sales on behalf of customers, and indirectly regulated the foreign exchange settlement and sale behavior by increasing the bank transaction cost , thereby stabilizing the market expectations of the RMB exchange rate.
Dongwu Fixed Income pointed out that after the foreign exchange risk reserve ratio is raised, banks need to hand over 20% of the forward foreign exchange sales contract amount to the central bank last month. The central bank will return the bank in full after one year. During this period, banks will face higher foreign exchange risks, so they will increase the quotations to enterprises accordingly. The forward foreign exchange demand of enterprises will be suppressed, thereby reducing banks' spot foreign exchange purchase demand to promote the balance of supply and demand in the foreign exchange market and curb the expectations of RMB depreciation.
Earlier, the central bank decided on September 5 that from September 15, 2022, the reserve ratio of financial institutions' foreign exchange deposit will be lowered by 2 percentage points, that is, the reserve ratio of foreign exchange deposits will be lowered from the current 8% to 6%.
Foreign exchange deposit reserve refers to the deposit of a financial institution to deposit a certain proportion of its foreign exchange deposits absorbed by PBOC in accordance with regulations. That is, commercial banks need to hand over a certain amount of US dollars to the accounts formulated by the central bank. If the central bank lowers the foreign exchange reserve ratio, the US dollar that commercial banks can use freely increases. The increase in the domestic US dollar can alleviate the pressure on RMB depreciation to a certain extent.
The pressure to depreciate the RMB is still there. There are three major reasons behind it.
GF Securities pointed out that since its establishment in 2015, the foreign exchange risk reserve ratio has been adjusted four times. Two of them were upscaling, which occurred in the depreciation cycles in October 2015 and August 2018 respectively; two of them were downscaling, which occurred in the appreciation cycles in September 2017 and October 2020 respectively.
In the short term, policies have all played a role in stabilizing the exchange rate; but after looking at it for a long time, the exchange rate has a certain inertia under the established trend, which still depends on the internal and external fundamentals of the cycle.
This round of RMB exchange rate depreciation cycle starts from March 2022, and the depreciation has exceeded 10% so far. The main reasons are : First, the domestic situation is affected by the epidemic and real estate, and growth expectations are weak; second, overseas Fed Under the macro environment of high inflation pressure and economic resilience, the pace of hiking interest rates is relatively dense, Europe is affected by the energy crisis and the economy is weak, and the US dollar index is strong; third, geopolitical events such as the situation in Russia and Ukraine affect global risk preferences, and the risk aversion sentiment is strong, further pushing up the US dollar, putting pressure on the RMB.
In the short term, due to the gradual decline in high temperature weather and the efforts of stable growth policies in China, the economy has improved month-on-month and stabilized at a low level; but the strong overseas US dollar index has not yet eased and may continue to put pressure on the RMB. Under this pressure, if the RMB exchange rate continues to be depreciated, the central bank may continue to upgrade its policy of stabilizing the exchange rate. Possible policies include restarting countercyclical adjustment factors, continuing to lower the foreign exchange reserve ratio, and strengthening macro-prudential management of full-scope cross-border financing.
Essentially, the exchange rate depends on three pricing dimensions: purchasing power parity, interest rate spread of , and risk premium . From the first dimension, breaking the consumption constraints and dragging down the investment side of the real estate industry chain, the economy has stabilized from the current initial month-on-month period to further showing a rebound momentum towards the potential growth rate will be a key signal; from the second dimension, when the US interest rate hike cycle is confirmed to be near the end of the end, it will be a key signal; from the third dimension, the decline in global risk aversion sentiment will be a key signal.
Guojin Macro Zhao Wei also pointed out that under the strong dollar suppression, the RMB exchange rate may still be under pressure; but the market impact of this round of depreciation may be relatively limited. After the central bank withdraws from the normalized intervention of the foreign exchange market, the reversal of the upward and depreciation trend often requires a change in the core driving factors of the market, and the main reason for this round of depreciation is the suppression of the strong US dollar. Under the differentiation of fundamentals between the United States and Europe, the US dollar may be difficult to change in its phased strength, and may still put pressure on the RMB exchange rate to depreciate. Considering the adjustment of capital behavior under the people's capital, the impact of this round of RMB exchange rate depreciation on the domestic market may be relatively limited.
Opportunities behind the depreciation of RMB
Guangdong Securities pointed out that the depreciation of RMB will benefit labor-intensive industries , such as the profit performance of export-oriented industries such as household appliances, electronics, automobiles, power equipment, beauty care, machinery and equipment, textiles and clothing. Due to the high proportion of overseas revenue, exchange rate changes are negatively correlated with the profits of the above industries (i.e., the depreciation of RMB will increase profits).
On the contrary, the depreciation of the exchange rate will have an adverse impact on the raw material import industry, mainly due to the increase in cost-side pressure, and industries such as transportation, steel, coal, agriculture, forestry, animal husbandry and fishery have been greatly affected.
At the same time, the profits of the high foreign currency liability industry and the solvency of will also be negatively affected. The depreciation of the RMB makes debt companies need to pay more RMB when repaying principal and interest. The foreign currency liability repayment pressure in real estate, electronics, petroleum and petrochemicals, non-ferrous metals, transportation, agriculture, forestry, animal husbandry and fishery industries is under great pressure.
However, the pressure on imports and exports to maintain stable growth is increasing. The State Council Information Office held a regular briefing on the State Council’s policies at 3 pm on September 27. Wang Shouwen, the international trade negotiator of the Ministry of Commerce, said that the development environment of foreign trade is becoming increasingly complex, and the growth rate of world economy and global trade has declined. my country’s foreign trade is of course also facing some uncertainty, and the uncertainty is increasing. The pressure to maintain stable growth in imports and exports is increasing, and it is necessary to introduce a new round of foreign trade stabilization policies to alleviate our enterprises' difficulties, solve their problems and help them.
This article comes from the financial world
