After the recent RMB exchange rate fell below the 7.3 mark, the central bank stepped in! On September 1, the central bank announced that in order to improve the ability of financial institutions to use foreign exchange funds, the people's Bank of China decided to reduce the foreign exchange deposit reserve ratio of financial institutions by 2 percentage points from September 15, that is, the foreign exchange deposit reserve ratio will be reduced from the current 6% to 4%.After the news was announced, the RMB exchange rate then rose sharply and quickly recovered the 7.26 mark. The RMB exchange rate in the Hong Kong market rose in a straight line, once rising above 7.24 yuan. On September 1, the onshore RMB closed at 7.2595 against the US dollar, up 295 basis points from the previous trading day and night, with an all-day trading volume of US $28.948 billion.What is a foreign exchange deposit reserve and why does it boost the exchange rate?





RMB under pressure foreign exchange to meet the "downgrade" foreign exchange reserve ratio, refers to the financial institutions to the central bank to deposit foreign exchange reserves and its absorption of foreign exchange deposits ratio. According to Wang Youxin, a senior researcher at the Bank of China Research Institute, the foreign exchange deposit reserve ratio of financial institutions is an important macro-prudential policy tool, which is usually adjusted when the exchange rate fluctuates significantly.In recent times, the RMB exchange rate has continued to fluctuate downward. On August 21, the exchange rate of the US dollar against the RMB fell below the 7.3 mark for the first time in the year, and then returned to hover around 7.29. "The adjustment of the foreign exchange reserve ratio at this time is mainly to boost the performance of the RMB exchange rate and to combat certain short RMB practices." Yang Delong, chief economist of Qianhai open source fund, said in an interview with reporters that due to the large deviation of Sino US monetary policy and the central bank's interest rate reduction in order to promote economic development, the RMB is currently depreciating against the US dollar. "It is very necessary for the central bank to make a move at this time." Yang Delong stressed. Wang Youxin also told reporters that there are obvious fluctuations in market sentiment. At this time, adjusting the foreign exchange deposit reserve ratio can play a good role in counter cyclical adjustment, increase the supply of foreign exchange in the financial system, improve the supply and demand situation of foreign exchange in the market, and at the same time, play a role in stabilizing the exchange rate and market sentiment by releasing policy signals.Will the sharp rise of RMB exchange rate usher in the inflection point? After the "official announcement" of the central bank, the RMB exchange rate against the US dollar rose rapidly and rebounded to within 7.26, and the offshore RMB exchange rate also rebounded to around 7.26.Wang Youxin said that the exchange rate rebound is not only due to the adjustment of the foreign exchange reserve ratio, but also because China has successively introduced many favorable policies in the past two days, which is a set of combined punches. In addition, the U.S. economy is also pulling back, interest rate hikes are expected to fall, and the internal and external environment of the RMB exchange rate is improving. On the evening of August 31, the People's Bank of China and the State Administration of Financial Supervision and Administration jointly issued a document announcing the unification of the national minimum down payment ratio policy for commercial personal housing loans, and no longer distinguish between cities that implement "purchase restrictions" and cities that do not implement "purchase restrictions". The lower limit of the minimum down payment ratio policy for commercial personal housing loans for the first set of housing and the second set of housing is not less than 20% and 30%. This move caused widespread concern in the market.
Wang Youxin said that the successive introduction of policies such as stimulating consumption, promoting investment, supporting the private economy, lowering the lower limit of the real estate down payment ratio, and raising the tax deduction standard will significantly boost economic growth expectations and improve market sentiment. In the context of the good news, the late trend of the RMB is also more clear. "It is expected that the policy dividend will continue to be released in the fourth quarter, the economic recovery will accelerate, the effect of relevant policies will gradually appear, the RMB exchange rate will return to orderly and stable fluctuations, and the probability of volatility will rise." Wang Youxin said.What is the foreign exchange reserve ratio Foreign exchange reserve refers to the financial institutions in accordance with the provisions of its absorption of foreign exchange deposits in a certain percentage of the People's Bank of China deposits, that is, commercial banks need to hand over a certain amount of U.S. dollars to the central bank designated account.Therefore, the central bank's reduction of the foreign exchange deposit reserve ratio of financial institutions can increase the supply of foreign exchange in the market, and the free use of US dollars by commercial banks will increase, while hedging the depreciation pressure of the RMB exchange rate. The last adjustment of the foreign exchange deposit reserve ratio was on September 15, 2022, when the foreign exchange deposit reserve ratio of financial institutions was reduced by 2 percentage points, that is, the foreign exchange deposit reserve ratio was reduced from the current 8% to 6%. According to statistics from CITIC Securities, before September 2022, the central bank had adjusted the foreign exchange deposit reserve ratio three times, including two increases in 2021 and one reduction in 2022, which can boost confidence in the short term.Since the beginning of this year, the central bank has regulated the RMB exchange rate. According to the official website of the People's Bank of China, in order to further improve the macro-prudential management of full-caliber cross-border financing, continue to increase the sources of cross-border funds for enterprises and financial institutions, and guide them to optimize their asset-liability structure, the People's Bank of China and the State Administration of Foreign Exchange have decided to adjust the cross-border financing of enterprises and financial institutions. The macro-prudential adjustment parameters were raised from 1.25 to 1.5 and implemented on July 20, 2023. During that time, there was a brief rebound in the yuan.Why reduce the foreign exchange reserve requirement ratioThe reduction of the foreign exchange deposit reserve ratio of financial institutions also released the policy signal of the central bank to stabilize the foreign exchange market. Pang Ming, chief economist and research director of Jones Lang LaSalle Greater China, believes that this move clearly releases a clear policy signal to stabilize foreign exchange market expectations and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level,To a certain extent, it can restrain the expectation of unilateral depreciation of RMB exchange rate, hedge the pressure of RMB exchange rate, and prevent the emergence of "unilateral market" and "herd effect."This policy move shows that the relevant departments continue to adopt appropriate policy tools and macro-prudential tools to demonstrate their confidence and determination to iron out market fluctuations and maintain the policy goal of exchange rate stability, which is conducive to the balance of supply and demand in the domestic foreign exchange market, and to better achieve basic stability at a reasonable equilibrium level." Pang Ming said. The chief economist of CITIC Securities clearly believes that lowering the foreign exchange deposit reserve ratio of financial institutions will form an effective support for the RMB exchange rate, and the RMB exchange rate may fluctuate and operate in the future. Cinda macro review said: Since 2022, the central bank has lowered the foreign exchange deposit rate three times, the first time on April 25, 2022 by 1 percentage point, when the dollar against the yuan exchange rate from 6.30 to break 6.55. The second was a 2 percentage point cut on September 5, 2022, which coincided with the Fed's epic rate hike, China's central bank cut the 1-year MLF rate by 10bp in August, and the dollar depreciated from 6.70 to 6.90 against the yuan. Lowering the foreign exchange deposit rate will help ease the pressure of RMB depreciation. The mechanism is that lowering the foreign exchange reserve ratio will release part of the foreign exchange liquidity, increase the supply of US dollars in the foreign exchange market, and increase the willingness and ability of financial institutions to sell foreign exchange, thereby alleviating the pressure of RMB depreciation. As of the end of July 2023, the balance of various foreign exchange deposits of financial institutions was US $821.8 billion. The reduction of the foreign exchange reserve ratio by 2 percentage points will release foreign exchange liquidity of about US $16.4 billion.

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