1. How important is the daily correction?
This is the most obvious tool the PBOC has to influence the currency. A base rate will be set at 9:15 am Beijing time on each trading day, before and after which the renminbi is allowed to fluctuate by 2% in both directions. The rate takes into account factors such as the previous day’s official closing price at 4:30 pm, the movement of the renminbi against a basket of currencies, and changes in other major exchange rates. Therefore, encouraging a drop at the close of official trading allows central banks to set a weaker peg without sending a strong policy signal or destabilizing the market. One way for him to get a sense of the policy signal behind the correction is to compare it to market expectations. When the benchmark rate is significantly stronger or weaker than expected, it is usually taken as a signal from the Chinese government.
The Amendment has undergone many iterations over the years with the aim of making it more market-based and transparent. China began allowing the renminbi to trade within 0.3% of its fixed rate against the dollar in January 2006, 0.5% in May the following year, 1% in April 2012, and 2% in March 2014. expanded to China devalued the yuan in August 2015. The domestic renminbi is undergoing the most dramatic foreign exchange reform in a decade. To make the adjustment more transparent, the People’s Bank of China (PBOC) laid out the factors banks should consider when pricing interest rates.
3. How can the People’s Bank of China induce a fixed rate?
In 2017, the People’s Bank of China introduced a “countercyclical factor” into the formula used by commercial banks to calculate and contribute to the Chinese government’s daily base interest rate. The move was made to avoid a correction that the central bank deemed too weak at the time. This component was removed in 2018 and then reinstalled, but in October 2020 the lender stopped using this factor. In the market, the speculation of additional reintroduction of yuan support in 2022 has surfaced as the gap between fixed interest rate expectations and expectations has widened to a level that cannot be explained by calculations based on the usual fixed rate model. Some banks offering fixed rates are said to have adjusted their models for the yuan’s depreciation in August, rather than due to the resurgence of the tool. Some suggested that the tool would be reintroduced as the yuan depreciates in mid-2023.
4. What else can central banks do?
One of the PBOC’s newest tools is the so-called foreign exchange reserve ratio, which sets the amount of foreign currency deposits banks need to hold as reserves. This change will allow central banks to fine-tune foreign currency liquidity within the banking system. For example, lowering the ratio would ease the supply of foreign exchange and support the renminbi. The People’s Bank of China raised the ratio twice in 2021 and raised it to 9% by the end of the year, before cutting it twice to 6% in 2022. Prior to these changes, this ratio he hadn’t changed since 2007.
5. What about less formal measures?
Chinese officials are not shy about devaluing their currency when necessary. The People’s Bank of China’s currency benchmark is that the renminbi remains basically stable at a reasonable equilibrium level. But in January 2022, when the yuan reached its highest level since 2018, People’s Bank of China Vice Governor Liu Guoqiang said that “market and policy factors will help correct short-term deviations from equilibrium levels.” Stated. In September of the same year, as the yuan was depreciating, regulators urged banks to respect their “exchange market mandate.” In June 2023, the central bank said it would “take comprehensive measures to stabilize expectations” on the currency and “resolutely prevent the risk of large fluctuations”. Moreover, to guide market expectations, the PBOC tends to cite statements from the China Foreign Exchange Commission, an industry association founded by key participants in the onshore market under the guidance of regulators. Some comments are targeted at specific transactions. In November 2021, lenders were urged to review their own volumes to “improve risk management,” and onshore dollar yuan spot volumes dropped significantly in response to the remarks.
6. What can be done about speculation?
Inflating the cost of offshore betting against the yuan was once a favored tactic when China wanted to limit the yuan’s depreciation, such as in 2016 and 2018. The key is to rake in liquidity, and Hong Kong is by far the largest market. To borrow RMB, you have to pay a high interest rate. This can be done by having proxy banks buy the currency or by refusing to supply it to other banks. The People’s Bank of China could also increase the issuance of renminbi banknotes in Hong Kong. As for the onshore market, the People’s Bank of China had additional tools to raise the cost of yuan depreciation. The People’s Bank of China (PBOC) last year reimposed a 20% risk reserve requirement on futures sales by banks to customers, a tool it introduced during the 2018-2020 Sino-US trade war. The measure resulted in the imposition of punitive fees on speculative trading. The cost of betting to short the yuan has risen in the derivatives market.
7. What about capital controls?
Controlling the flow of funds, both domestically and internationally, is one of the blunt measures. China’s move to curb outflows following the 2015 devaluation of the yuan, imposing restrictions on everything from overseas acquisitions by Chinese companies to consumers taking out insurance policies in Hong Kong, is showing signs of easing. very few. Conversely, the government has facilitated capital inflows during 2021 by initiating new routes with Hong Kong to allow mainland investors access to offshore bond markets and wealth management products. As the US Federal Reserve begins tightening monetary policy in 2022, Chinese state-owned enterprises have been asked to pay more attention to new overseas spending and investment plans. As seen in early 2021, the central bank could also adjust restrictions on foreign borrowing and lending to financial institutions and companies.
8. What about foreign exchange reserves?
China’s foreign exchange reserves exceed $3 trillion, making it the largest in the world. Policymakers sold billions of dollars to support the yuan after it was devalued in 2015. While this could be a useful indicator, it could also be affected by a broader rise in the dollar, leading to a reduction in China’s reported foreign exchange reserves. These declines are not necessarily the result of intervention, but rather because non-dollar assets in China’s reserves fall against the dollar. In 2022, the People’s Bank of China will allow land-based enterprises to borrow more abroad, increasing the inflow of foreign capital.
–With help from Ran Li.
Stories like this can be found at bloomberg.com
