Original title: In November, foreign exchange reserves rose slightly and exceeded market expectations, and global capital favored RMB assets
21st Century Business Herald reporter Chen Zhi reporter from Shanghai
Although the Fed’s reduction of QE in early November brought a considerable impact on global assets, China’s foreign exchange reserves still showed a steady wave of dynamics.
On December 7, the central bank released the latest data showing that as of the end of November, China’s foreign exchange reserves were US$3222.4 billion, a month-on-month increase of US$4.8 billion from October.
It is worth noting that this is also much higher than the market’s expected value of 326.3 billion US dollars.
A Wall Street hedge fund manager revealed to reporters that the market expected that the US dollar index rose in November, which would lower the valuation of non-US assets in foreign exchange reserves when converted into US dollars, dragging down foreign exchange reserves slightly. Therefore, many Wall Street investment institutions were “surprised” by the small increase in foreign exchange reserves in November.
In his opinion, the reason why foreign exchange reserves increased slightly from the previous month in November was mainly affected by three factors. First, the continued high boom in China’s foreign trade increased the demand for foreign exchange settlement at the end of the year of enterprises, which eventually transformed part of the foreign trade surplus into foreign exchange reserves; It is the fact that foreign capital continued to increase its positions in domestic bonds by a large margin that month, which also drove foreign exchange reserves to absorb more overseas investment funds; third, the diversified investment strategy of foreign exchange reserves effectively hedged against the pressure on non-US asset valuations caused by the rise in the US dollar, and helped stabilize foreign exchange reserves increase.
Wang Chunying, deputy director of the State Administration of Foreign Exchange, said that in November, China’s foreign exchange market transactions remained active, and cross-border capital flows were generally stable. In the international financial market, affected by factors such as the progress of the new crown pneumonia epidemic and the monetary policy expectations of major countries, the US dollar index has risen, and the bond prices of major countries have generally risen. Foreign exchange reserves are denominated in U.S. dollars. Under the combined effect of exchange rate conversion and asset price changes, the scale of foreign exchange reserves increased during the month.
She emphasized that the current new crown pneumonia epidemic is still fluctuating around the world, the world economic recovery is facing more uncertain and unstable factors, and the international financial market fluctuates greatly. However, China is scientifically coordinating epidemic prevention and control and economic and social development, and economic operations are generally stable and continuous. Recovery will help maintain overall stability in the scale of foreign exchange reserves.
In the opinion of many foreign exchange traders of joint-stock banks, the small increase in foreign exchange reserves in November also shows that China’s cross-border capital flows successfully withstood the impact of the Fed’s pull to reduce the QE trigger, which will make the RMB exchange rate trend stronger.
As of 19:00 on December 7, the exchange rate of USD to RMB (CNY) in the domestic onshore market reached 6.3676, an increase of 87 basis points from the previous trading day.
A foreign exchange trader at a large state-owned bank told reporters that the renminbi exchange rate will remain at a relatively high level in the future under the multiple factors of continuous economic growth in China, the continued boom in foreign trade, the steady fluctuation of foreign exchange reserves, and the continuous increase of foreign capital in renminbi assets. Two-way volatility, even if the Fed raises interest rates three times next year, it may not be able to shake the renminbi’s fairly strong trend.
Why the appreciation of the U.S. dollar failed to depress foreign exchange reserves
“Whenever the US dollar index rises, many Wall Street investment institutions will habitually lower the estimated value of China’s foreign exchange reserves.” The aforementioned Wall Street hedge fund manager told reporters. The reason is that they believe that the rise in the U.S. dollar will inevitably lead to a decline in the valuation of non- U.S. dollar assets in China’s foreign exchange reserves when they are converted into U.S. dollar prices, which will drag down the scale of foreign exchange reserves.
In November, the U.S. dollar index rose from 94.12 to 96.04 due to the Fed’s initiation of QE reduction, making them again bet that China’s foreign exchange reserves would fall slightly that month, and then buy or sell the renminbi exchange rate arbitrage.
A Wall Street multi-strategy hedge fund manager said frankly that they had previously lowered the forecast of China’s foreign exchange reserves in November, but as the 10-year U.S. Treasury yield quickly dropped to 1.456% at the end of November, lower than the 1.561% at the beginning of the month. They quickly corrected their previous erroneous estimations—instead, they raised the estimated value of China’s foreign exchange reserves and increased their long positions in the renminbi.
“As U.S. bond yields fall (bond prices rise), the valuation of China’s foreign exchange reserves with trillions of U.S. bonds will instead usher in a significant rebound.” He pointed out. In addition, they also found that although the US dollar index rose significantly in November, not all non-US currencies fell. For example, under the sudden impact of Omi Kejon, the exchange rate of the yen against the US dollar rose instead of falling in November, making China’s foreign exchange reserves. The Yen assets here show an increase in valuation when converted to U.S. dollar prices.
In the opinion of many Wall Street investment institutions, the reason why China’s foreign exchange reserves increased slightly from the previous month in November was also due to the strong demand for corporate foreign exchange settlement caused by the continuation of China’s high foreign trade boom.
“Many foreign trade companies convert their foreign exchange funds into RMB before the end of the year, which will inevitably lead to part of the foreign exchange funds of the trade surplus being absorbed by foreign exchange reserves.” The aforementioned Wall Street multi-strategy hedge fund manager believes.
In the view of many foreign exchange traders of joint-stock banks, the absorption of foreign exchange funds from foreign trade surpluses by foreign exchange reserves is quite limited. On the one hand, banks have increasingly rich foreign exchange hedging strategies and foreign exchange use channels, and there is no need to “deposit” foreign exchange funds to the central bank to hedge exchange rate risks. Under this circumstance, the current changes in the scale of China’s foreign exchange reserves are mainly due to fluctuations in its asset prices, and as the foreign exchange reserve asset allocation strategy becomes increasingly decentralized, the influence of the rise in the U.S. dollar index on the increase or decrease in the scale of foreign exchange reserves will gradually weaken. Foreign exchange reserves are more stable and dynamic.
Overseas capital favors domestic bonds
Reporters have learned from many sources that many Wall Street investment institutions believe that the reason why China’s foreign exchange reserves in November were significantly higher than market expectations was another important factor that was that foreign capitals increased their positions in domestic bonds that month.
The latest data released by the China Foreign Exchange Trading Center show that as of the end of November, the scale of domestic bonds held by foreign institutions reached 3.93 trillion yuan, an increase of about 80 billion yuan from the end of October, marking the largest increase in holdings in a single month since February this year.
“Global capital continues to increase its positions in RMB bonds, which will inevitably drive part of the investment capital to be converted into foreign exchange reserves.” A chief representative of the Asia-Pacific region of a large European asset management agency said. In fact, many overseas investment institutions have also discovered an interesting phenomenon through data analysis. Whenever global capital increases their positions in RMB bonds, there is a high probability that China’s foreign exchange reserves will increase slightly that month.
The aforementioned foreign exchange dealers of large state-owned banks said that although foreign institutions increased their holdings of about 80 billion yuan (approximately US$12.5 billion) in bonds in November, its impact on the increase in foreign exchange reserves was extremely limited. The reason is that part of the global capital is mainly used to increase domestic bonds through the Bond Connect channel, that is, foreign exchange is completed in Hong Kong and will not be converted into domestic foreign exchange reserves; second, part of the global capital is invested in domestic bonds through QFII or bank agent channels. But banks may not “transfer” these funds to the central bank, but for other purposes.
“In fact, in recent years, there has been a new trend in foreign investment holdings in RMB bonds, that is, more and more overseas investment institutions directly use offshore RMB to invest in domestic bonds, which shows that the RMB is increasingly becoming the reserve currency of large global asset management institutions.” Pointed out. In addition, the continuous flow of foreign capital into the domestic bond market will make the RMB exchange rate and China’s cross-border capital flow sufficient to cope with the impact of the Fed’s early interest rate hike.
The reporter was informed that many investment institutions on Wall Street are currently betting that the Fed will raise interest rates three times this year, and have lowered the exchange rate valuations of non-US currencies, except for the RMB exchange rate. Even some Wall Street investment institutions will increase the RMB to US dollar exchange rate next year to the first line of 6.30. . The reasons are as follows: First, the continued high foreign trade boom has allowed the continued strength of the RMB exchange rate to gain strong support; second, the continuous increase of foreign capital in domestic bonds has made China’s cross-border capital flow more capable of responding to the impact of the Fed’s hawkish interest rate hike; Many overseas investment institutions are confident that China’s foreign exchange reserves will continue to fluctuate steadily. Even if asset price fluctuations reduce the valuation of foreign exchange reserves, relevant Chinese authorities have many channels to absorb foreign exchange funds to enrich foreign exchange reserves and ensure stable fluctuations in both foreign exchange reserves and the RMB exchange rate.
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