RMB Depreciation: Constantly Erode Market Confidence In The Central Bank Of China

As for the recent decline in China's foreign exchange reserves, the head of the China foreign exchange administration explained that the central bank provided foreign exchange funds to the market to regulate the balance of foreign exchange supply and demand, the devaluation of non US dollar currencies against the US dollar after the US election, and the multiple factors such as the price of the bond also had a callback, resulting in a decline in the scale of foreign exchange reserves.

When the renminbi is in a trap of slow and sustained depreciation, it is not only a constant elimination of market confidence in the Central Bank of China, but also a constant strengthening of the depreciation of the RMB exchange rate, which is also the most important reason for China's declining foreign exchange reserves.

It can be said that the most fundamental reason for the current decline in China's foreign exchange reserves is that the market has no confidence in the central bank and that the expectation of RMB depreciation is constantly strengthening.

All these phenomena are related to the current exchange rate system arrangement. If the current exchange rate regime is not perfected and improved, it is only emphasized.

The role of regulation is very limited.

In this regard, the Central Bank of China do not know?

The foreign exchange reserve data released by the people's Bank of China show that at the end of 11, China's foreign exchange reserves stood at 30516 billion US dollars, a new low since March 2011, a decrease of 69 billion 60 million US dollars from the end of 10 this year.

This is also the fifth consecutive month of declining foreign exchange reserves, and the biggest monthly decline this year.

China's foreign exchange reserves have decreased by 278 billion 800 million US dollars this year.

If China's foreign exchange reserves reached a high level of US $3 trillion and 990 billion in June 2014, China will be in November this year.

It has fallen to 30516 billion US dollars, and it has decreased by 940 billion US dollars in 29 months, and the reduction has reached four points.

Is it reasonable for the officials of the China Administration of foreign exchange to explain whether this explanation is reasonable or not? It is rather uncertain and the explanation for reality is not strong enough.

Because over the past two years or so, China's foreign exchange reserves have decreased by nearly 25%. The market is generally not optimistic about the RMB, but the US dollar is in short supply. Is this trend going to continue? In the past two years, the RMB has fallen from 6.11 to 6.90 against the US dollar, and the decline has reached 13%.

Under such circumstances, the Yuan's funds can not flow into the US dollar system, and the reduction of foreign exchange reserves is also natural.

But for this reason, the tone of the Chinese government has always believed that the renminbi has no basis for sustained depreciation.

This means that RMB and RMB assets should not be converted into dollar and dollar assets at all. China's foreign exchange reserves will only increase rather than decrease (because China has been experiencing trade surplus in recent years), but in fact, this is not the case. Chinese enterprises and residents are converting the RMB and RMB assets into US dollars and assets.

That is to say, according to the interpretation of foreign exchange administration officials, the reduction of foreign exchange reserves is determined by the relationship between supply and demand, and is the result of the depreciation of the renminbi expected by the market and enterprises. This is contrary to the emphasis of the government on the basis of the continued depreciation of the renminbi.

Another explanation of foreign exchange administration officials is that the depreciation of non US dollar against the US dollar after the US election has led to a decrease in China's foreign exchange reserves.

There are two problems.

First, the strength of the US dollar will lead to the depreciation of the non US dollar currency. If China's foreign exchange reserves occupy a certain non US dollar currency and the non US dollar currency depreciates, the total amount of China's foreign exchange reserves will naturally decrease.

Two, as a non US dollar currency, the strength of the US dollar will also lead to weakness or depreciation of the RMB.

In November, the US dollar exchange rate index strengthened and the RMB exchange rate accelerated against the US dollar. The central parity depreciated by 1.78%, while the CNY decreased by 1.69%. Both of them set the biggest monthly decline since the reform of the RMB exchange rate system in August 2015.

With such a large depreciation rate, China's funds will naturally run away, leading to a decrease in China's foreign exchange reserves.

It can be seen that for the reduction of China's foreign exchange reserves, no matter how many different reasons the officials of the China foreign exchange administration give, the reason is that the residents and enterprises both at home and abroad are reluctant to hold the currencies and assets that are expected to depreciate.

Therefore, the increase or decrease of China's foreign exchange reserves will depend fundamentally on the appreciation or depreciation of the renminbi in the future.

But in fact, the RMB exchange rate is falling into the trap of slow depreciation in accordance with the institutional arrangement since the reform of the RMB exchange rate of 811 in 2015.

If the RMB continues to depreciate slowly, China's foreign exchange reserves will also decrease. The government hopes that all kinds of regulation and interception will reduce the flow of funds out of China.

It's impossible.

It can be said that in 2015, 811 yuan.

In order to meet the requirements of IMF to allow RMB to be included in SDR, the pparency of the central parity of RMB has been increased.

In fact, according to the new exchange rate system, the pparency of the central parity of RMB has been significantly improved.

The purpose of increasing the central parity of RMB is to increase the degree of marketization of the RMB exchange rate, so that the RMB can achieve two-way fluctuations according to the market supply and demand.

Therefore, in December 2015, China set up a basket of currency exchange rate index of RMB exchange rate, and from February this year, the central parity pricing mechanism adopted a double anchorage system, that is, the middle price depends on the change of market supply and demand (by the closing rate at 4:30 every day) and the fluctuation of the external market (through the overnight exchange rate of a basket of currencies).

This double anchor pricing mechanism has a good intention.

Because under this mechanism, we can not only change the supply and demand relationship of the domestic market, but also pay attention to the change of the US dollar exchange rate in the offshore market, and drive the two-way fluctuation of the RMB exchange rate through two kinds of relationship changes.

It can be said that when the exchange rate mechanism was just operating in the market, its effect was immediate. It not only made the market follow the rules, but also gradually stabilized the expectation of the RMB market, thus alleviating the market's worry about the one-time depreciation of RMB.

But the condition is that the supply and demand relationship in the domestic market is fluctuating or basically balanced.

If this condition is not satisfied, that is, the imbalance between market supply and demand, the exchange rate pricing mechanism of the two anchors may make the RMB fall into a trap of slow slow appreciation or slow depreciation, and can not drive the two-way fluctuation of the RMB exchange rate.

It can be seen that over the past few months, China's monthly foreign exchange reserves and foreign exchange reserves have declined, and the balance of foreign exchange has been maintained every month.

All these show that the market supply and demand relationship is completely unbalanced.

If the demand for us dollars in the domestic market is always in short supply, then the central parity of the renminbi can only continue to fall.

At this time, the two-way fluctuation of RMB is only the global trend of US dollar.

In this case, the double anchored exchange rate pricing mechanism will lead to the asymmetric depreciation of RMB in the past few months.

The dollar weakened and the renminbi weakened, while the US dollar weakened and the renminbi would not go strong.

Coupled with the British referendum, the pound weakened too much. After the election of President Trump, the US dollar continued to strengthen, which made the RMB exchange rate against the US dollar depreciated to 6.90.

It can be seen that the current double anchor exchange rate pricing mechanism puts the renminbi in a trap of slow and sustained depreciation.

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