Beijing Business News (reporter Yue Pin-yu Liao Meng) financial institutions foreign exchange deposit reserve ratio ushered in the year's first adjustment. According to the official website of the People's Bank of China (PBOC) on April 25, the central bank decided to lower the foreign exchange reserve ratio (RRR) of financial institutions by 1 percentage point from the current 9% to 8% starting From May 15, 2022, in order to improve the ability of financial institutions to use foreign exchange funds.

Due to the depreciation of RMB, the operation of foreign exchange reserve ratio by central bank also triggered hot debate. China's currency, the Yuan, depreciated for four trading days from April 19 to 22, returning to the 6.5 level in just a few months. Specifically, on the morning of April 25, the renminbi continued last week's depreciation trend, with the central parity rate of the renminbi against the DOLLAR falling by more than 300 basis points in a single day to hit 6.49. The onshore and offshore RMB continued to depreciate against the US dollar, with the onshore RMB falling below the 6.57 mark for the first time since April 2021. The offshore renminbi fell below the 6.60 mark for the first time since November 2020.

"The People's Bank of China will adjust the foreign exchange deposit reserve facilities appropriately according to market conditions. First, it will increase the supply of foreign exchange, adjust the supply and demand of foreign exchange and promote market balance. Second, it will send a signal of 'stability' in the foreign exchange market to avoid market overshoot." Everbright Bank financial market department macro researcher Zhou Maohua said that the central bank in advance of the pre-adjustment fine-tuning, help stabilize market expectations. Based on China's foreign exchange deposit balance of 996.9 billion US dollars at the end of 2021, the central bank cut the foreign exchange reserve ratio by 1%, releasing about 9.67 billion US dollars of liquidity.

The foreign exchange deposit reserve ratio refers to the ratio of the foreign exchange deposit reserves deposited by financial institutions to the foreign exchange deposits absorbed by the central bank. It is also one of the important tools used by the central bank to regulate supply and demand in the foreign exchange market. The reduction of the foreign exchange reserve ratio can release foreign currency liquidity, increase the supply of foreign exchange in the market, the foreign exchange will face depreciation, and the RMB will face appreciation.

The onshore and offshore RMB exchange rate rose against the US dollar in response to the news that the central bank "lowered the foreign exchange reserve requirement ratio of financial institutions by 1 percentage point", pulling up in the short term. The offshore RMB appreciated from 6.60 to 6.57 usd, an appreciation of nearly 300 basis points, according to Wind data. The onshore renminbi also appreciated from 6.56 to 6.53, also nearly 300 basis points. Subsequently, the offshore and onshore RMB depreciated slightly against the US dollar. As of 21:20 on April 25, the offshore RMB was quoted at 6.5915 against the US dollar, a decrease of 0.98% in the day. The onshore yuan traded at 6.5604 against the dollar, down 1.12 percent on the day.

Beijing Business Daily reporter learned that in 2021, the RMB exchange rate rose sharply, repeatedly broke new highs. Against this background, the People's Bank of China also raised the foreign exchange deposit reserve ratio of financial institutions by 2 percentage points in May and December 2021, raising the foreign exchange deposit reserve ratio from 5% to 9%. However, after the middle of March 2022, the Federal Reserve continuously released hawkish signals, the DOLLAR index continued to rise, and the depreciation pressure of RMB appeared. During this period, the interest rate inversion between China and the US even occurred for the first time in 12 years. Speculation has also been rife about what tools regulators will use to stabilize exchange rate expectations amid concerns such as cross-border capital outflows due to the continued depreciation of the renminbi.

Wang Chunying, deputy director and spokesperson of the State Administration of Foreign Exchange (SAFE), said at a press conference on "foreign exchange balance data in the first quarter of 2022" on April 22 that the Fed's interest rate hike is indeed an important external variable, but the fundamental factor is still its own macro fundamentals and market basis. As for China, the resilience of its foreign exchange market has been increasing in recent years, and it has the foundation and conditions to adapt to this round of policy adjustments by the Federal Reserve.

Guan Tao, global chief economist of Bank of China Securities, told Beijing Business Daily that the RMB exchange rate has been adjusted recently, but the foreign exchange market is generally stable, and we still need to pay close attention to and watch out for the trend of THE RMB exchange rate against the background of the Fed's more than expected tightening.

Guan tao pointed out that as long as the recent momentum of the spread of the epidemic in China is effectively controlled, and as long as the macro policy is proactive and intensified at the right time, the prospect of economic recovery is clear, market confidence is restored, and foreign investment may return at any time. Keeping exchange rate policy flexible is important to boost foreign investor confidence.

When talking about the next stage of the RMB exchange rate trend, Zhou Maohua believed that the domestic economy is expected to run within a reasonable range due to the timely introduction of policies and proactive efforts in response to economic difficulties. Monetary policy continued to maintain a prudent tone; Strong resilience in foreign trade. From the perspective of the trend, the short-term fluctuation of RMB exchange rate will not change the stable operation pattern, and RMB is expected to fluctuate strongly in both directions near the equilibrium level. In the medium and long term, China's financial service market has huge potential, and the long-term positive development trend of China's economy will provide fundamental support for the basic stability of the RMB exchange rate.

Wang chunying also stressed at the meeting that China will continue to implement a prudent monetary policy and enhance the flexibility of the RMB exchange rate. The SAFE will also closely monitor the situation in the foreign exchange market, strengthen macro-prudential management of cross-border capital flows, guide the orderly flow of cross-border capital, strike a balance between internal and external equilibrium, and keep the RMB exchange rate basically stable at an appropriate and balanced level. 

-- This article is excerpted from Beijing Business Daily