On December 9, the Central Bank of the Communist Party of China announced that it would raise the foreign exchange deposit reserve ratio of financial institutions by 2 percentage points from December 15 from the current 7% to 9%. This move is usually aimed at restraining the appreciation of the renminbi.
After the announcement of the above decision, the offshore renminbi against the US dollar fell below the 6.36 mark, once fell by 0.60% to reach 6.3839. The onshore renminbi against the U.S. dollar recorded its biggest decline in the past six months, closing at 6.3778 in night trading.
The Central Bank of the Communist Party of China raised the reserve ratio last time on June 15 this year. At that time, the rate of increase was also 2 percentage points, which pushed the RMB, which reached a high point during the year, to a significant fall. The People’s Bank of China announced at the end of May this year that it would raise the foreign exchange deposit ratio by 2 percentage points.
Bloomberg reported on December 9 that this is a clear signal from the Chinese Communist Party’s supervisory authorities on the recent strength of the RMB exchange rate, which is expected to help accelerate the conversion of market expectations.
The onshore renminbi has risen by about 2.9% this year, ranking first among Asian currencies. Thanks to the weakening of concerns about the mutant virus, most major currencies and Asian currencies have risen against the U.S. dollar, and the renminbi has risen accordingly and broke through the high point of the year, setting a new high since mid-2018. For a basket of currencies, Bloomberg’s simulated CFETS RMB index also rose above 103, hitting a new high since August 2015.
By the end of November, China’s foreign currency deposit balance was US$1.02 trillion, an increase of 2% of the foreign exchange deposit reserve, which means that from December 15th, financial institutions will have to deposit an additional US$20 billion to the Central Bank of the Communist Party of China.
Wen Bin, chief researcher of China Minsheng Bank, said that raising the foreign exchange deposit reserve ratio is equivalent to tightening the supply and liquidity of US dollars in the foreign exchange market in order to reduce the pressure on the appreciation of the renminbi.
Tao Chuan, chief macro analyst at Soochow Securities, believes that a 2% increase in the foreign exchange deposit reserve ratio is unlikely to bring any substantial changes to the abundant domestic dollar liquidity, but this move has given the central bank’s feelings about the recent surge in the renminbi. Uneasy and hope to contain a clear signal of the upward trend.
Tao Chuan said that if more countries reopen next year, the appreciation of the renminbi may hurt the competitiveness of China’s exports. These may constitute the reason for the clear signal from the Central Bank of the Communist Party of China.
Bloomberg reported that the announcement of the Central Bank of the People’s Republic of China to raise foreign exchange deposit standards will help eliminate expectations for year-end appreciation, and reduce the spread of domestic and foreign currency interest rates to guide swap points further down, reducing the hedging cost of foreign investment in the Chinese market, which is conducive to Guide the inflow of foreign capital.
The Financial Times reported on December 9 that foreign investment in stocks and bonds in emerging markets outside of China has suddenly ceased because of concerns that many economies will not be able to recover from the CCP virus epidemic next year. The CCP virus (new crown virus) is a variant of Omicron. And expectations of interest rate hikes in the United States have worsened the prospects of these economies.
According to data from the International Finance Association (IIF), at the end of November, non-resident capital inflows of assets in emerging markets (except China) turned negative, the first time since market turmoil triggered by the new crown epidemic in March 2020.
On December 9, Fitch, an internationally renowned rating agency, stated in a statement that China Evergrande’s outstanding USD debt due this week has officially defaulted, and the default rating of China Evergrande and Kaisa’s long-term foreign currency issuers was assigned by ” “C” is downgraded to “restrictive default”, and the ratings of the two subsidiaries of Evergrande have also been downgraded in the same way.
It is expected that in the next step, Evergrande may enter bankruptcy liquidation, debt restructuring or continue to maintain operations. Evergrande’s default status may also trigger a cross-default of developers’ $19.2 billion debt.
Wang Jian, a senior financial media person, said that Evergrande’s on-balance sheet borrowing was 2 trillion yuan, and off-balance sheet borrowing was 1 trillion yuan, totaling 3 trillion yuan in debt, all of which were bank loans. China’s GDP is only 100 trillion a year, and Evergrande accounts for 3%. Evergrande’s bankruptcy will suffer the most.
Wang Jian believes that the impact of real estate on the entire economy and financial markets will eventually affect the RMB exchange rate. From a macro perspective, if the financial system is impacted and there are systemic financial risks, the renminbi will definitely be impacted.
Wu Xiaoling, a Chinese financial scientist and former deputy governor of the central bank, pointed out that once China’s real estate collapses, it will directly lead to the collapse of China’s bubble economy and trigger a crisis in the banking system. Because if the house price plummets, the house slave might break the payment and return the house to the bank. Not only the landlord, but also the bank may jump off the building.
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