On September 26, the people's Bank of China announced that in order to stabilize the expectations of the foreign exchange market and strengthen macro-prudential management, the people's Bank of China decided to raise the foreign exchange risk reserve ratio for forward foreign exchange sales from 0 to 20% from September 28, 2022. At one point, the offshore RMB rose 300 points against the dollar after the news.

As a policy tool for the central bank to stabilize the foreign exchange market, the last time the people's Bank of China adjusted the foreign exchange risk reserve ratio for forward foreign exchange sales was on October 12, 2020, nearly two years after the central bank acted again.

Experts said that the central bank raised the foreign exchange risk reserve ratio for forward foreign exchange sales in order to increase the forward foreign exchange purchase costs of bank customers and avoid excessive accumulation of short expectations in the foreign exchange market. The current policy has begun to signal a stable exchange rate. In view of the fact that the current exchange rate of the RMB has not depreciated rapidly away from the trend of the US dollar, the central bank's regulation and control has the nature of preparing in advance in order to further stabilize the expectations of the foreign exchange market.

Reduce the demand for long-term foreign exchange purchase by enterprises

As a policy tool for the central bank to stabilize the foreign exchange market, the last time the people's Bank of China adjusted the foreign exchange risk reserve ratio for forward foreign exchange sales was on October 12, 2020, nearly two years after this adjustment.

Forward foreign exchange sale is a kind of exchange rate risk aversion derivative provided by banks to enterprises. Enterprises can avoid the future exchange rate risk to a certain extent through forward foreign exchange purchase, but because enterprises do not purchase foreign exchange immediately, and banks need to purchase foreign exchange in the spot market accordingly, this will affect the spot exchange rate, and then affect the forward foreign exchange purchase behavior of enterprises. This pro-cyclical behavior can easily evolve into a "herding effect".

After "8.11" in 2015, in order to curb excessive fluctuations in the foreign exchange market, the people's Bank of China incorporated the bank's forward foreign exchange sales into the macro-prudential policy framework and collected foreign exchange risk reserves from financial institutions engaged in valet forward foreign exchange sales, and the required reserve ratio was set at 20%.

Unlike the people's Bank of China, which lowered the foreign exchange risk reserve ratio for forward foreign exchange sales to zero on October 12, 2020, the central bank decided to raise the foreign exchange risk reserve ratio from 0 to 20%.

Wen Bin, chief economist of China Minsheng Banking Corp, said that this move increases the cost of long-term foreign exchange sales by banks, reduces the demand for long-term foreign exchange purchases by enterprises, and thus reduces the demand for foreign exchange purchases in the spot market, which is conducive to the balance between supply and demand in the foreign exchange market.

Pang Ming, chief economist and head of research at Jones Lang LaSalle Greater China, also pointed out that the people's Bank of China adopts the countercyclical adjustment tool of raising the foreign exchange risk reserve ratio. By increasing the capital cost of banks engaged in related business and the cost of long-term purchase of US dollars, reducing unreal demand such as arbitrage demand in forward foreign exchange purchase demand, the people's Bank of China restricts irrational behavior in the forward foreign exchange market. Restraining the excessive fluctuation and unilateral change expectation of the foreign exchange market and preventing the excessive depreciation or appreciation of the RMB are beneficial to the two-way fluctuation of the RMB against the US dollar at a reasonable and balanced level.

The central bank actively acts to stabilize the expectations of the foreign exchange market.

Whether the people's Bank of China decided on September 5 to lower the foreign exchange deposit reserve ratio of financial institutions by 2 percentage points, or whether the people's Bank of China raised the foreign exchange risk reserve ratio for forward foreign exchange sales to 20%, it is a measure taken by the central bank to deal with the recent depreciation pressure of the RMB against the US dollar.

Since August 12, the exchange rate of RMB against the US dollar has depreciated rapidly. On the evening of September 15, the offshore RMB exchange rate against the US dollar broke the "7" round mark, and then on September 22, the offshore RMB exchange rate against the US dollar fell below the 7.1 mark.

Pang Ming said that the central bank clearly released the policy signal of stabilizing the expectations of the foreign exchange market and keeping the RMB exchange rate basically stable at a reasonable and balanced level, indicating its determination to maintain the policy goal of exchange rate stability and "cooling" the expectation of unilateral devaluation of the RMB. It is expected to ease the pressure of excessive devaluation of RMB, promote the balance of supply and demand in the domestic foreign exchange market, and return the trend of RMB exchange rate to a reasonable equilibrium level. To some extent, it can restrain the expectation of unilateral devaluation of RMB exchange rate, irrational overshoot and possible "herding effect".

Wang Qing, chief macro analyst at Oriental Jincheng, pointed out that looking ahead, the US dollar will continue to run strongly for some time due to the continued substantial interest rate hikes by the Federal Reserve and the risk aversion demand driven by geographical factors. Before the end of the year, the RMB still has the momentum of passive depreciation against the US dollar, but this does not mean that the RMB is substantially weak or the exchange rate risk is heating up. One of the signs is that the three major RMB exchange rate indices (CFETS\ BIS\ SDR) will remain basically stable. The depreciation of the RMB against the US dollar in the short term will not pose an important constraint on the flexible adjustment of domestic macro policies.

The foreign exchange market operates smoothly and there is no basis for a sustained devaluation of the RMB.

According to data from the State Administration of Foreign Exchange, in August, the settlement rate for measuring foreign exchange settlement willingness (the ratio of customers' foreign exchange sales to banks to customers' foreign exchange earnings) was 71%, an increase of 3 percentage points over the monthly average so far this year. It shows that the main body of the market maintains the rational trading mode of "every high foreign exchange settlement", and the willingness to settle foreign exchange has increased. The selling rate that measures the willingness to sell foreign exchange (the ratio of customers' foreign exchange purchases from banks to customers' foreign exchange expenditure) is 67%, which is basically the same as the monthly average so far this year, and the willingness of market players to buy foreign exchange is generally stable.

Wen Bin said: from the perspective of China's economic fundamentals, it is expected that the growth rate of GDP in the third quarter is significantly higher than that in the second quarter, the level of inflation is moderate and controllable, and the balance of payments is in good condition.In particular, the basic items of international payments, such as current account and direct investment, have maintained a relatively high surplus, which has laid the foundation for the stability of the RMB exchange rate and the stable operation of the foreign exchange market, and there is no foundation for sustained depreciation of the RMB.

Pang Ming said that under the new normal of two-way volatility and increased range of RMB exchange rate, many positive factors behind it will continue to exist in the long run, and reflect the successful practice and effective balance among the tasks of stabilizing growth, adjusting structure, controlling risks and promoting reform in China's economy. In the medium term, the package of policies for stabilizing the economy will come into effect, the effectiveness of successive policies and measures will be released, the endogenous growth momentum of the main body of the market will be strengthened, the recovery and development of China's national economy will continue, and the prosperity will remain at a relatively high level.

The RMB internationalization report 2022 released a few days ago pointed out that in the next stage, the people's Bank of China will coordinate development and security, and steadily promote RMB internationalization on the basis of market-driven and independent choices of enterprises. We will further consolidate the basic institutional arrangements for the cross-border use of RMB, meet the needs of the physical sector for the use of RMB, promote the two-way opening of higher-level financial markets, and promote the virtuous circle of the onshore and offshore markets of RMB. At the same time, we will continue to improve the macro-prudential management framework for cross-border capital flows with the integration of local and foreign currencies, establish and improve a monitoring, evaluation and early warning system for cross-border capital flows, and firmly maintain the bottom line that systemic risks will not occur.