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Market News The central bank raised the foreign exchange deposit reserve ratio twice during the year. What is the significance?
The central bank raised the foreign exchange deposit reserve ratio twice during the year. What is the significance?
The central bank raised the foreign exchange deposit reserve ratio twice during the year. What is the significance?
2021-12-10
6968
On December 9, the People’s Bank of China website announced that: In order to strengthen the management of foreign exchange liquidity of financial institutions, the People’s Bank of China has decided to increase the foreign exchange deposit reserve ratio of financial institutions by 2 percentage points from December 15, 2021, that is, foreign exchange deposit reserve. The gold rate has been increased from the current 7% to 9%.
After the news was released, the onshore and offshore RMB against the U.S. dollar changed from the recent trend of "rising and rising" and plunged quickly, with a short-term drop of more than 200 basis points. As of press time, the offshore market has fallen by more than 350 basis points, once breaking the 6.38 mark.
The foreign exchange deposit reserve refers to the deposits of the People's Bank of China that financial institutions deposit a certain percentage of their foreign exchange deposits in accordance with regulations.
"The increase in the foreign exchange deposit reserve ratio is equivalent to tightening the supply and liquidity of the U.S. dollar in the foreign exchange market, thereby reducing the pressure on the appreciation of the renminbi and helping the renminbi exchange rate to maintain a basic stability at a reasonable and equilibrium level against the U.S. dollar." Wen Bin, chief researcher of China Minsheng Bank, said.
Guan Tao, chief economist of BOCI Securities, analyzed to reporters that the recent rise in the renminbi exchange rate against the trend has increased the risk of exchange rate overshoots that deviate from economic fundamentals. Increasing the reserve requirement ratio of foreign exchange deposits in banks is the first time that the eighth working conference of the National Foreign Exchange Market Self-discipline Mechanism proposed that "the degree of deviation is proportional to the correction force" on November 18, the central bank further released the signal to strengthen the management and regulation of exchange rate expectations. This will help withdraw domestic U.S. dollar liquidity, converge domestic renminbi-dollar spreads, reduce the impulse of enterprises to settle foreign exchange, and promote the stability of the renminbi exchange rate.
The central bank raised the foreign exchange deposit reserve ratio at this time to point to the expected appreciation of the renminbi. Since the beginning of this year, the renminbi exchange rate has maintained an appreciation trend. From April to May, and since October, two rounds of more obvious appreciation have been staged.
Especially on December 8, the onshore and offshore RMB exchange rates both surged, breaking through the high point at the end of May this year, breaking through 6.35 yuan during the intraday session, setting a new high since May 2018.
As of December 3, the CFETS RMB Exchange Rate Index, which reflects the change in the weighted average exchange rate of the RMB against a basket of currencies, reported 102.66, the highest level since December 2015 and an increase of 8.25% from the end of 2020.
Some macro analysts said, “This wave of RMB appreciation is too fast, which hides great risks, especially when the U.S. currency is tightened. The adjustment will help cool the RMB appreciation and enable the RMB to truly open bilateral volatility.”
Wen Bin analyzed that the recent appreciation of the renminbi is mainly due to several factors: First, the domestic epidemic prevention and control has achieved remarkable results, and it is the first to realize the resumption of work and production, and the industrial chain supply chain is maintained. Second, the rapid recovery of China’s economy is the prerequisite and basis for the appreciation of the renminbi; third, since last year, China’s export situation has improved, and the trade surplus has reached a record high, supporting the renminbi exchange rate; fourth, the continued net inflow of capital accounts Last year, China became the world's largest economy attracting foreign direct investment, and this year continues to maintain a momentum of continuous inflows. At the same time, under the capital account, overseas funds in the bond market and stock market are also optimistic about the continued competitiveness of China's capital market.
As of the end of November, the balance of foreign currency deposits was US$1.02 trillion. This increase of 2% means that from December 15th, financial institutions will have to deposit a total of 20 billion U.S. dollars to the central bank. Banks need to acquire more foreign exchange positions in the short term to meet higher foreign exchange deposit reserve requirements.
This is the second time the central bank raised the foreign exchange deposit reserve ratio this year. On May 31 this year, the central bank raised the foreign exchange deposit reserve ratio from 5% to 7%.
In addition to the two increases this year, the foreign exchange deposit reserve ratio has undergone three adjustments in history, from 2% to 3% in 2004, 4% in 2006, and 5% in 2007. In history, the central bank raised the foreign exchange deposit reserve ratio for these three times, which also played a role in restraining the exchange rate appreciation pressure during the period when the exchange rate appreciation pressure increased.
In Wen Bin's view, with China's economy continuing to improve, epidemic prevention and control has achieved remarkable results, and the balance of payments maintains a double surplus, the RMB has maintained a trend of appreciation against the US dollar. However, in the short term, the rapid unilateral appreciation of the renminbi is likely to have some impact on our economy and enterprise level, especially for small and medium-sized export companies. The appreciation of the renminbi will bring exchange losses and export competitiveness. Decline.
"At present, the People's Bank of China has adopted timely policy measures to increase the foreign exchange deposit reserve ratio, which can reduce the supply and liquidity of the U.S. dollar in the foreign exchange market, thereby reducing the pressure on the appreciation of the renminbi and keeping the renminbi stable against the U.S. dollar at a reasonable and balanced level." Bin said.
(Source: Economic Observer)
After the news was released, the onshore and offshore RMB against the U.S. dollar changed from the recent trend of "rising and rising" and plunged quickly, with a short-term drop of more than 200 basis points. As of press time, the offshore market has fallen by more than 350 basis points, once breaking the 6.38 mark.
The foreign exchange deposit reserve refers to the deposits of the People's Bank of China that financial institutions deposit a certain percentage of their foreign exchange deposits in accordance with regulations.
"The increase in the foreign exchange deposit reserve ratio is equivalent to tightening the supply and liquidity of the U.S. dollar in the foreign exchange market, thereby reducing the pressure on the appreciation of the renminbi and helping the renminbi exchange rate to maintain a basic stability at a reasonable and equilibrium level against the U.S. dollar." Wen Bin, chief researcher of China Minsheng Bank, said.
Guan Tao, chief economist of BOCI Securities, analyzed to reporters that the recent rise in the renminbi exchange rate against the trend has increased the risk of exchange rate overshoots that deviate from economic fundamentals. Increasing the reserve requirement ratio of foreign exchange deposits in banks is the first time that the eighth working conference of the National Foreign Exchange Market Self-discipline Mechanism proposed that "the degree of deviation is proportional to the correction force" on November 18, the central bank further released the signal to strengthen the management and regulation of exchange rate expectations. This will help withdraw domestic U.S. dollar liquidity, converge domestic renminbi-dollar spreads, reduce the impulse of enterprises to settle foreign exchange, and promote the stability of the renminbi exchange rate.
The increase will help the RMB appreciate and cool down
The central bank raised the foreign exchange deposit reserve ratio at this time to point to the expected appreciation of the renminbi. Since the beginning of this year, the renminbi exchange rate has maintained an appreciation trend. From April to May, and since October, two rounds of more obvious appreciation have been staged.
Especially on December 8, the onshore and offshore RMB exchange rates both surged, breaking through the high point at the end of May this year, breaking through 6.35 yuan during the intraday session, setting a new high since May 2018.
As of December 3, the CFETS RMB Exchange Rate Index, which reflects the change in the weighted average exchange rate of the RMB against a basket of currencies, reported 102.66, the highest level since December 2015 and an increase of 8.25% from the end of 2020.
Some macro analysts said, “This wave of RMB appreciation is too fast, which hides great risks, especially when the U.S. currency is tightened. The adjustment will help cool the RMB appreciation and enable the RMB to truly open bilateral volatility.”
Wen Bin analyzed that the recent appreciation of the renminbi is mainly due to several factors: First, the domestic epidemic prevention and control has achieved remarkable results, and it is the first to realize the resumption of work and production, and the industrial chain supply chain is maintained. Second, the rapid recovery of China’s economy is the prerequisite and basis for the appreciation of the renminbi; third, since last year, China’s export situation has improved, and the trade surplus has reached a record high, supporting the renminbi exchange rate; fourth, the continued net inflow of capital accounts Last year, China became the world's largest economy attracting foreign direct investment, and this year continues to maintain a momentum of continuous inflows. At the same time, under the capital account, overseas funds in the bond market and stock market are also optimistic about the continued competitiveness of China's capital market.
The second increase in the year
As of the end of November, the balance of foreign currency deposits was US$1.02 trillion. This increase of 2% means that from December 15th, financial institutions will have to deposit a total of 20 billion U.S. dollars to the central bank. Banks need to acquire more foreign exchange positions in the short term to meet higher foreign exchange deposit reserve requirements.
This is the second time the central bank raised the foreign exchange deposit reserve ratio this year. On May 31 this year, the central bank raised the foreign exchange deposit reserve ratio from 5% to 7%.
In addition to the two increases this year, the foreign exchange deposit reserve ratio has undergone three adjustments in history, from 2% to 3% in 2004, 4% in 2006, and 5% in 2007. In history, the central bank raised the foreign exchange deposit reserve ratio for these three times, which also played a role in restraining the exchange rate appreciation pressure during the period when the exchange rate appreciation pressure increased.
In Wen Bin's view, with China's economy continuing to improve, epidemic prevention and control has achieved remarkable results, and the balance of payments maintains a double surplus, the RMB has maintained a trend of appreciation against the US dollar. However, in the short term, the rapid unilateral appreciation of the renminbi is likely to have some impact on our economy and enterprise level, especially for small and medium-sized export companies. The appreciation of the renminbi will bring exchange losses and export competitiveness. Decline.
"At present, the People's Bank of China has adopted timely policy measures to increase the foreign exchange deposit reserve ratio, which can reduce the supply and liquidity of the U.S. dollar in the foreign exchange market, thereby reducing the pressure on the appreciation of the renminbi and keeping the renminbi stable against the U.S. dollar at a reasonable and balanced level." Bin said.
(Source: Economic Observer)
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