Sufficient foreign exchange management toolbox, solid foundation for RMB exchange rate stability
2023-11-14
The Central Financial Work Conference explicitly requested "to strengthen the management of the foreign exchange market and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level", releasing a strong policy signal to the foreign exchange market. The foreign exchange market is a trading venue for foreign exchange supply and demand, and is also an important component of China's financial market. The constantly occurring international trade and investment make this market closely connected to domestic and foreign investors, and it is also related to the vital interests of the vast number of foreign-related business entities. Since the beginning of this year, influenced by factors such as monetary policy differentiation and geopolitical factors, the global foreign exchange market has faced significant fluctuations, and the RMB has also been under significant pressure. The foreign exchange market has subsequently faced the test of exchange rate fluctuations and cross-border capital flows. During the year, the Chinese yuan's exchange rate against the US dollar fell below 7, causing various noises. Subsequently, under internal and external pressure, it approached the 7.40 level at one point. The policy layer has a clear determination to "stabilize expectations and prevent overshoots". The policy toolbox comprehensively implements policies and corrects deviations, playing a key role in stabilizing confidence in the foreign exchange market in a volatile market. Since the second half of the year, foreign exchange countercyclical adjustment tools have taken turns, lowering the reserve requirement ratio for domestic US dollar deposits, increasing the issuance of offshore central bank bills, and a series of measures to stabilize exchange rates have been launched in an orderly manner, timely correcting market procyclical behavior, Effectively preventing the risk of exchange rate overshoot. Between the rise and fall, the RMB exchange rate has shown full resilience. In the complex international context, although the Chinese yuan has fallen against the US dollar, it has remained stable against a basket of currencies. Compared to the 3.7% depreciation of the Chinese yuan against the CFETS basket index in 2022, since 2023, the Chinese yuan has not decreased but increased against the CFETS basket index, indicating that the effective exchange rate of the Chinese yuan has basically stabilized in 2023. The market needs to see that the rise and fall of the RMB exchange rate is a manifestation of the increased marketization of the exchange rate formation mechanism. Currently, with the steady progress of the reform of the exchange rate formation mechanism, the decisive role of market supply and demand in the formation of the exchange rate is constantly increasing, and the elasticity of the RMB exchange rate is significantly enhanced. Behind this is a more mature foreign exchange market - after years of development, China's foreign exchange market has always adhered to the foundation of market supply and demand, with more mature market participants, more rational trading behavior, and prominent market resilience. Moreover, financial regulation is more relaxed and experienced in responding to market changes. As financial executives have repeatedly emphasized recently, 'We have confidence, ability, and conditions to maintain the stable operation of the foreign exchange market and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.'. The solidity of the goal of maintaining the basic stability of the RMB exchange rate at a reasonable and balanced level lies in the fact that it is supported by a rich foreign exchange management toolbox, a more mature foreign exchange market that has undergone multiple tests, and a stable economic fundamentals under policy guidance. Looking at the current situation, internal and external factors resonate, and favorable factors for the RMB exchange rate are accumulating. On the one hand, with the global economic downturn and a decline in inflation, the tightening cycle of global central banks has come to an end, and in the future, the interest rate gap between China and the United States will gradually converge to the normal range; On the other hand, with the gradual effectiveness of stable growth policies and continuous improvement of economic indicators, China's economic fundamentals continue to improve. The International Monetary Fund
Edit：Hou Wenzhe Responsible editor：WeiZe
Source：Shanghai Securities Daily
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