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The central bank "hit the brakes"! Offshore RMB exchange rate breaks five levels in a row
Aug 21,2023
On July 20, the People's Bank of China and the State Administration of Foreign Exchange decided to raise the macro-prudential adjustment parameters for cross-border financing of enterprises and financial institutions from 1.25 to 1.5.
After the central bank and the foreign exchange bureau raised the macro-prudential adjustment parameters for cross-border financing, in early trading on July 20, the onshore yuan strengthened in a straight line, once approaching the 7.16 mark, reaching a maximum of 7.1620, up more than 600 points from the previous day's closing price.
The offshore RMB also appreciated strongly against the US dollar, rising above the five barriers of 7.23, 7.22, 7.21, 7.20 and 7.19, rising by more than 500 points at most in the day.
Up again after 9 months
Macroprudential adjustment parameters for cross-border financing are an important tool for regulating cross-border capital flows and exchange rates.
This adjustment is since October 25, 2022, the central bank, foreign exchange bureau raised the cross-border financing macro-prudential adjustment parameters, after nearly nine months to adjust the parameters again.
According to the Securities Times, according to relevant policies and regulations, the level of macro-prudential adjustment parameters for cross-border financing directly affects the size of the upper limit of the risk-weighted balance that enterprises and financial institutions can raise overseas, according to the Securities Times.
Experts generally pointed out that raising the macro-prudential adjustment parameters for cross-border financing of enterprises and financial institutions can raise the upper limit of the risk-weighted balance of cross-border financing of enterprises and financial institutions and encourage market entities to raise cross-border financing.
According to Wen Bin, chief economist of Minsheng Bank, historically, the regulator has lowered the macro-prudential adjustment parameters for cross-border financing of financial institutions and enterprises from 1.25 to 1 since December 2020 and January 2021, respectively, when the RMB exchange rate was in the appreciation range.
In October 2022, the regulator shifted to raise the macro-prudential adjustment parameters for cross-border financing of financial institutions and enterprises from 1 to 1.25, when the RMB exchange rate was in the depreciation range.
At present, the exchange rate of RMB against the US dollar is near 7.2, and this adjustment reflects the intention of the regulatory authorities to reasonably guide the market exchange rate expectations.
The intention of previous adjustments
It is worth noting that since the implementation of the national macro-prudential management of cross-border financing in 2016, the central bank has adjusted the macro-prudential adjustment parameters of cross-border financing at least four times in seven years, mainly in 2020-2022, but with different calibers.
From 2019 to the first half of 2020, the RMB exchange rate went all the way down, the exchange rate fluctuated in the 6.9-7.1 range, and depreciation pressure was high, so the central bank raised this parameter from 1 to 1.25 for the first time on March 11, 2020.
At the end of 2020, the domestic economy and exports rebounded strongly, the RMB exchange rate appreciated rapidly, and in order to ease the pressure of appreciation, the central bank lowered the macro-prudential adjustment parameters for cross-border financing of enterprises and financial institutions from 1.25 to 1 on December 11, 2020 and January 7, 2021.
Subsequently, domestic exports continued to be strong, the trend of exchange rate appreciation did not ease significantly, and the RMB exchange rate appreciated further from 6.45 at the beginning of 2021 to near 6.35 at the end of the year.
As a result, the central bank raised the macro-prudential adjustment parameter for cross-border financing of enterprises and financial institutions from 1 to 1.25 on October 25, 2022.
Since the beginning of this year, the signal measures to stabilize the exchange rate have continued to increase. Including reducing the foreign exchange deposit reserve ratio of financial institutions, curbing the expectation of rapid unilateral decline of RMB in advance, increasing the foreign exchange risk reserve ratio of long-term foreign exchange sales business, and preventing excessive devaluation of RMB.
Subsequent trend of RMB exchange rate
According to the Daily Business News, Wang Qing, chief macro analyst at Oriental Jincheng, pointed out that the higher the macro-prudential adjustment parameters for cross-border financing, the higher the upper limit for cross-border financing for enterprises and financial institutions.
This will not only help small and medium-sized enterprises and private enterprises to make better use of various international and domestic channels to raise funds, but also directly increase the liquidity of domestic US dollars and ease the pressure of RMB depreciation.
Talking about the follow-up trend of the RMB exchange rate, Wang Qing pointed out that with the landing of interest rate cuts in June as a sign, a number of stable growth policies are being introduced, and the momentum of macroeconomic recovery in the third quarter is expected to strengthen. Thus, from the fundamental trend, the second half of the RMB depreciation pressure can be controlled.
In addition, the Fed will stop raising interest rates in the second half of the year, and the dollar index is easy to fall but difficult to rise. As a result, the RMB exchange rate has the potential to turn from weak to strong in the later period, and is expected to enter the sub -7.0 range again by the end of the year.
Earlier, Liu Guoqiang, deputy governor of the People's Bank of China, said that the RMB exchange rate has fluctuated recently. The trend of the RMB exchange rate depends on the fundamentals of the economy in the long run and is uncertain in the short run.
In the long and short term, China is a large open economy, and the exchange rate is affected by various factors, which may rise or fall. But up and down, it won't go anywhere.
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