Source: Broker China

Author: Shi Qian

Just now, the central bank has expanded its recruitment!

According to the People's Bank of China website, in order to improve the ability of financial institutions to use foreign exchange funds, the People's Bank of China has decided to lower the foreign exchange reserve ratio of financial institutions by 2 percentage points from September 15, 2023, that is, the foreign exchange reserve ratio will be lowered from the current 6% to 4%.

Boosted by this, the offshore renminbi rose by nearly 200 points, and the dollar was hit to 7.25 against the renminbi. At the same time, the A50 also picked up in a straight line. Analysts believe that judging from successive reductions in the foreign exchange reserve ratio, it can indeed have the effect of boosting confidence in the short term.

In addition to the central bank's actions, there is another positive development: Caixin's manufacturing PMI for August was 51, compared to 49.2 previously. This means that the signs that China's economy is stabilizing are already very obvious.

So, will the continued net outflow of foreign capital be stopped?

The central bank made a big move

This morning, news from the People's Bank of China website said that in order to improve the ability of financial institutions to use foreign exchange funds, the People's Bank of China decided to lower the foreign exchange reserve ratio of financial institutions by 2 percentage points starting September 15, 2023, that is, the foreign exchange reserve ratio from the current 6% to 4%.

Foreign exchange reserves refer to deposits made by financial institutions with the People's Bank of China for a certain percentage of foreign exchange deposits absorbed by them in accordance with regulations.That is, commercial banks need to hand over a certain amount of US dollars to an account set by the central bank. If the central bank lowers the foreign exchange reserve ratio, the amount of dollars that commercial banks can freely use will increase. An increase in the domestic dollar can ease the pressure on the RMB to depreciate to a certain extent.

On September 5 of last year, the central bank carried out a similar operation. Against the backdrop of the relatively rapid depreciation of the RMB at the time, the central bank announced a 2 percentage point reduction in foreign exchange deposit reserves.According to statistics from CITIC Securities, before September 2022, the central bank adjusted the foreign exchange reserve ratio 3 times, including 2 increases in 2021 and 1 reduction in 2022, which can have the effect of boosting confidence in the short term. The general background for 2021 is China's economic recovery and strong exports, and the RMB continues to appreciate. Therefore, the central bank announced an increase in the foreign exchange reserve ratio twice on May 31, 2021 and December 9, 2021. The effect of the adjustment on May 31, 2021 was remarkable. After the announcement, the RMB exchange rate showed a pullback of more than 1000 bps. The adjustment on December 9, 2021 also had some effect. After the announcement, the RMB slowly pulled back around 800 bps. Of course, looking at the long-term line, these two adjustments did not change the general trend of RMB appreciation at the time. Since April 2022, the RMB has changed from an appreciation trend to a depreciation trend. Therefore, on April 25, 2022, the central bank announced a reduction in foreign exchange deposit reserves, but the impact of this policy on the exchange rate was not significant, and the RMB continued to depreciate until mid-May. Fundamentals remain a determining factor in medium-term exchange rates.

Since 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 macroprudential management of full-caliber cross-border financing, continue to increase the sources of cross-border capital for enterprises and financial institutions, and guide them to optimize their balance and liability structure, the People's Bank of China and the State Administration of Foreign Exchange decided to raise the macroprudential adjustment parameters for cross-border financing for enterprises and financial institutions from 1.25 to 1.5, which will be implemented on July 20, 2023. During that time, there was a brief rebound in the RMB.

Can the outflow of foreign capital stop the bleeding?

This time, the RMB also had a strong reaction. Following the release of this news, early trading today,$CNH/USD (CNHUSD.FX)$Pull up nearly 300 points in a straight line.

$FTSE China A50 Index (.FTXIN9.CN)$It's also a one-degree straight-line rise.

So, with the intensive actions of last night and this morning, after a net outflow of nearly 90 billion yuan in August, can the net outflow of foreign capital stop the bleeding? Analysts believe that logically speaking, as interest rates on real estate stocks and mortgages fall, the down payment ratio for one or two homes falls, and the real estate debt crisis eases, the economy should rebound steadily in the last quarter of this year. At the same time, macroeconomic policies continue to increase, and the stock market continues to have various benefits. From this perspective, there should be no continuous net outflow of foreign capital. But what are foreign investors really worried about? What kind of foreign capital continues to be sold? It's still not very clear.

Chen Guo, a strategy analyst at CITIC Construction Investment, believes that the cumulative net outflow of northbound capital over the past 20 trading days reached 87.777 billion dollars (statistics as of August 29), but since 2019, the cumulative net outflow of northbound capital has exceeded the level of 50 billion dollars on the 20th only 5 times, including April-May 2019, February to March 2020, July to August 2020, February to March 2022, and September-October 2022. In the above cases, short-term sharp outflows of capital to the north are generally correlated with rising geopolitical risks, heightened expectations of tightening overseas liquidity, and heightened economic risks at home and abroad.

The anchor point for the subsequent transition of northbound capital to net inflows is likely to be the cooling of geopolitical risk and the cooling of domestic economic risk (as some foreign investors think). On both fronts, there have been many positive signs recently. Starting from the capital side, historically, after the phased net outflow reaches a certain peak, the northbound capital will no longer continue to flow out. As of August 29, the net outflow of 87.777 billion dollars of northbound capital was close to its historical peak (the average net outflow of the past five cases was 90.683 billion dollars), and it is expected that the pressure for continued northbound outflows will be relatively low in the future. Furthermore, there is no sign that the northbound net inflow exceeds 7 billion dollars in a single day, and the confirmation signal on the right side of the northbound capital reversal is worth looking forward to.

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