Market stabilization is expected to reduce the cost of buying foreign exchange.

Original title: Market stabilization is expected to reduce the cost of buying foreign currency

In order to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level, the People’s Bank of China announced on the 10th that as of October 12, 2020, the foreign exchange risk reserve index for sales Forward currency will be reduced from 20% to 0.

The People’s Bank of China stated that since the beginning of this year, the RMB exchange rate has been floating in both directions based on market supply and demand, with greater flexibility, stable market expectations, orderly cross-border capital flows , stable operation of the foreign exchange market and a balanced market supply and demand. For this reason, the People’s Bank of China decided to reduce the foreign exchange risk reserve ratio for forward currency sales from 20% to 0. In the next step, we will continue to maintain the flexibility of the RMB exchange rate, stabilizing expectations and keeping the basic stability of the RMB exchange rate at a reasonable and equilibrium level.

The forward currency sales business is a type of exchange rate hedging derivative products that banks provide to companies. Companies can avoid future exchange rate risks through forward purchases of foreign exchange. However, since companies do not buy foreign exchange immediately, banks must buy foreign exchange in the spot market accordingly. This will affect the spot exchange rate, which in turn will affect the long-term exchange rate of the business. The behavior of futures purchases. This procyclical behavior easily evolves into the “herd effect”.

What is the foreign exchange risk reserve ratio? This tool, considered by the industry as an “automatic stabilizer” in the foreign exchange market, is essentially a price measure, that is, by influencing the forward price of the exchange rate, regulating forward purchases of foreign currency. Generally speaking, when the expectation of RMB depreciation is strong, the foreign exchange risk reserve ratio increases; When the expectation of RMB appreciation is strong, the foreign exchange risk reserve ratio is reduced.

“The foreign exchange risk reserve ratio is a countercyclical adjustment tool. Through adjustment, it prevents excessive appreciation or depreciation of the renminbi and achieves two-way fluctuations in the exchange rate of the renminbi against the US dollar at a reasonable and equilibrium level. “said Wen Bin, principal investigator at the Minsheng Bank of China. The exchange rate against the US dollar fluctuates more, and the general trend is from depreciation to increase. Especially as China’s economic fundamentals continue to improve, the RMB has appreciated significantly against the US dollar recently. At this time, the foreign exchange risk reserve ratio has been reduced to zero. This will help the RMB / USD exchange rate to maintain a reasonable and balanced level. On the other hand, it will also help banks reduce the cost of forward currency sales, increase corporate demand for this product, and better use derivatives to manage currency risks.

Xie Yaxuan, chief macroeconomic analyst at China Merchants Securities, believes that the purpose of reducing the risk reserve ratio for forward currency sales is to reduce restrictions on the behavior of forward currencies or increase demand in the market for foreign exchange. “Obviously, this is a decision made by the central bank based on the current currency market situation, that is, when the RMB exchange rate is increasing rapidly, to relax restrictions on forward currency purchases, the The purpose remains to let the foreign exchange market determine the RMB exchange rate. “

For example, when the original reserve ratio is 20%, suppose that a bank wants to conduct a business selling forward foreign exchange of $ 1 million and needs to establish a foreign exchange risk reserve of $ 200,000. This fund will be paid to the People’s Bank of China without interest. Store for one year. In this case, the bank will transfer the lost interest as the cost of the forward foreign exchange business, which will ultimately be borne by the customer who signs the forward contract with the bank, making the customer’s enthusiasm for the forward purchase of currencies will decline. Once the reserve ratio drops to zero, companies with real business needs will be able to buy foreign exchange at a lower cost.

In fact, this is not the first adjustment of the foreign exchange risk reserve ratio. In September 2017, the central bank timely adjusted the countercyclical macroprudential management measures introduced to curb procyclical fluctuations in the foreign exchange market and adjusted the foreign exchange risk reserve ratio to 0; in 2018, affected by factors such as trade frictions and changes in the international foreign exchange market, the foreign exchange market There are some signs of pro-cyclical fluctuations. In order to strengthen macroprudential management, the central bank has decided to adjust the foreign exchange risk reserve ratio for forward currency sales from 0 to 20% as of August 6, 2018.

Guan Tao, Global Chief Economist at Bank of China Securities, said that from August 2018 to August this year, the balance of unexpired forward currency sales on behalf of banks decreased by USD 113.7 billion, and the Undue term currency settlement increased by US $ 16.3 billion in August last year. Since the bank’s inception, the balance of the unexpired forward currency settlement and sale on behalf of clients has changed from net currency purchases to net currency settlement. If the foreign exchange risk reserve rate is reduced to zero again, it will help to free up the demand for forward currency purchases and further promote the balance between the supply and demand of foreign exchange. (Economic Daily, China Economic Net reporter, Yao Jin)Return to Sohu to see more