Recently, the escalation of Sino-US trade frictions has brought huge potential risks to global markets, especially the resulting exchange rate changes, which have drawn particular attention.
On May 25, Guo Shuqing, Party Secretary of the People's Bank of China (PBOC) and Chairman of the China Banking and Insurance Regulatory Commission (CBIRC), said that despite recent volatility in the foreign exchange market, Chinese enterprises and residents have not panicked. Short-term fluctuations in the RMB exchange rate are normal; in the long run, China's economic fundamentals determine that the RMB cannot continue to depreciate. Speculators shorting the RMB will inevitably suffer huge losses. On May 23, Liu Guoqiang, Deputy Governor of the PBOC and Deputy Director of the Office of the Financial Stability and Development Committee under the State Council, said that although the exchange rate has seen some occasional overshooting, market conditions are stable, and there has been no "accident" - nor will any be allowed.
The recent frequent remarks by PBOC officials emphasizing RMB exchange rate stability once again show that, amid heightened Sino-US trade frictions, maintaining RMB exchange rate stability is key to keeping the economy stable and responding to trade frictions. The trade frictions not only put downward pressure on the RMB exchange rate and cause asset depreciation, but also increase the pressure of capital outflows from China. The reduction in the trade surplus caused by intensified trade frictions has led to a situation of "double decline" in China's balance of payments. Foreign exchange reserves will continue to decline, forming a vicious cycle that leads to exchange rate depreciation and rising domestic inflation, which will impact China's economy. According to data from the London-based foreign exchange trading platform EBS, in the week ending May 10, offshore RMB trading volume was 120% higher than the average for the previous month. The surge in RMB trading volume reflects fund management companies' concerns that a breakdown in Sino-US talks could damage China's economy and put pressure on the RMB.
The consecutive decline in funds outstanding for foreign exchange also shows the impact of trade frictions. On May 14, the PBOC released the RMB credit funds balance sheet of financial institutions, showing that the central bank's funds outstanding for foreign exchange stood at 21.2528 trillion yuan in April, down 861 million yuan month-on-month. This was the ninth consecutive month of decline in funds outstanding for foreign exchange. China's foreign exchange reserves in April stood at US$3,094.95 billion, down US$3.8 billion from the previous month, also showing a downward trend.
The PBOC officials' emphasis that the exchange rate is "not allowed to have an accident" clearly signals that exchange rate stability has become the focus of the central bank's work for the current period and the near future. On the one hand, China has comprehensively tightened controls on capital flows; on the other hand, its tolerance for RMB depreciation is declining. China currently does not want the RMB to continue depreciating, because the capital outflow losses caused by depreciation will far outweigh the export gains from a weaker RMB. The central bank's recent combination of measures is precisely aimed at maintaining the stability of the RMB exchange rate. On May 15, the PBOC announced the successful issuance of 10 billion yuan each of 3-month and 1-year central bank bills in Hong Kong, with accepted yields of 3.00% and 3.10%, respectively. This was the third time the PBOC issued RMB central bank bills through the CMU bond tender platform of the Hong Kong Monetary Authority, following November last year and February this year. Total bids for this issuance exceeded 100 billion yuan, with subscribers including commercial banks, funds, investment banks, central banks, international financial organizations and other offshore market investors. A few days later, on the evening of May 21, the PBOC announced on its official Weibo account that it would issue RMB central bank bills in Hong Kong again in the near future.
The market generally believes that the intensive issuance of central bank bills will have a certain impact on offshore RMB liquidity. On the one hand, it raises the cost for short sellers to borrow RMB to short, thereby balancing the supply and demand of RMB funds in the Hong Kong market and tightening RMB liquidity there; on the other hand, it sends a strong signal of exchange rate stability. To some extent, the central bank's issuance of offshore central bank bills may become increasingly normalized. Judging from the central bank's recent series of operations, the RMB exchange rate issue has clearly drawn its attention, prompting it to take various actions to prop up the exchange rate and hedge against market depreciation expectations. As the RMB pool in the Hong Kong market is limited, issuing offshore central bank bills is equivalent to draining liquidity, which will have short-term market effects. However, this kind of exchange rate support is a "technical" operation; changing the overall market expectation for the RMB will still depend on whether Sino-US trade frictions can be eased. Combined with the previous verbal guidance from SAFE officials and the central bank's issuance of offshore RMB bonds in Hong Kong, these actions show that the central bank is approaching its bottom line for RMB exchange rate fluctuations. If depreciation breaks through this bottom line, the central bank will definitely intervene.
As experts have analyzed, although the central bank can use some tools to cope with short-term exchange rate fluctuations, in the long run, the stability of the RMB exchange rate still depends on domestic economic fundamentals, including a basically stable macro leverage ratio, generally controllable fiscal and financial risks, a broadly balanced balance of payments, and stable foreign exchange reserves. In the future, the RMB exchange rate will depend on changes in the international trade situation and, more importantly, on internal issues. Solving domestic economic structural problems, managing China's market space well, promoting further opening-up and reform, and unleashing economic vitality are the fundamental guarantee that the RMB exchange rate will "not have an accident."