**: Relying on Lan Guantao
Author: Guan Tao (Global Chief Economist, Bank of China);Lipin Liu is an analyst
The research report was released on December 18, 2023.
Summary
In November, affected by the easing of Fed tightening expectations and the unexpected decline in the US CPI in October, which led to the US dollar index and US Treasury yields**, the RMB exchange rate** and the volume of interbank spot inquiries also rebounded significantly.
In November, the number of "foreign exchange purchases on dips" by market players increased, and the foreign exchange settlement and sales of banks, namely forwards (including options), continued to run deficits since July, and the scale of the deficit expanded month-on-month. In this context, the ** Economic Work Conference emphasized "maintaining the basic stability of the RMB exchange rate at a reasonable and balanced level" for two consecutive years, and the ** Economic Work Conference in previous years only emphasized this expression in 2016 and 2017.
Under the condition that the RMB exchange rate stopped falling**, the demand for forward foreign exchange settlement of market entities increased, but the willingness to settle foreign exchange at spot hit a new low in the same period in recent years. The subsequent trend of the RMB exchange rate may be supported by the release of foreign exchange settlement demand, but it still mainly depends on the economic and policy direction of China and the United States.
Since 2017, the RMB has basically appreciated from November to January of the following year, showing a strong seasonal pattern, but the weakening of the US dollar is an important driving factor, and from the perspective of the settlement of foreign exchange around the Spring Festival in each year, the impact of the "foreign exchange settlement tide" on the RMB exchange rate should not be exaggerated.
In November, the willingness of foreign investors to allocate RMB bonds increased significantly, with a net inflow of 251.3 billion yuan under Bond Connect, with interbank certificates of deposit and treasury bonds being the main contributors, and the net outflow of funds under Mainland-Hong Kong Stock Connect narrowed significantly to 1.8 billion yuan, and the overall net inflow of foreign capital under investment resumed on the whole.
Risk WarningOverseas financial risks exceeded expectations, monetary policy adjustments of major central banks exceeded expectations, and domestic economic recovery was not as expected.
Body
On December 15, the State Administration of Foreign Exchange (SAFE) released its foreign exchange receipts and expenditures for November 2023. Combined with the latest data, the specific analysis of the domestic foreign exchange market in November is as follows:
The U.S. dollar index fell, and the volume and price of the domestic foreign exchange market rose
In November, the central parity of the RMB rose to 7 due to the easing of Fed tightening expectations and the unexpected decline in CPI in the United States in October, which led to the US dollar index and US bond yieldsAround 10, the spot rate rose back to 7Within 20. During the period, the U.S. dollar index fell from around 107 to 103, accumulating **30%, onshore RMB spot exchange rate (4:30 p.m. in the domestic interbank market, the same below)**26% (see Chart 1). As major non-US currencies rose more than the RMB, the China Foreign Exchange Trade System (CFETS) RMB exchange rate index, the reference BIS and SDR currency baskets continued to fall, and the cumulative increase in November**. 4% (see chart).
From November 1 to 17, the median price was basically stable at 717～7.Around 18, the average daily fluctuation range is only 4 basis points. On November 20, the median price of the next day appeared hundreds of basis points, from 7Rise below 16 to the end of the month 7Around 10, the cumulative appreciation is 10%, and the deviation of the spot exchange rate from the middle price in the same period was 0Within 5%, the average expected depreciation of the RMB exchange rate implied by the 1-year NDF is 04%, 1 percent narrower than the average from November 1 to 171 percentage point (see chart). The RMB exchange rate** was active in the foreign exchange market, and the interbank spot inquiry volume rebounded significantly, rising to US$34.7 billion on November 20 (the day the mid-rate jumped), and the average daily trading volume of the month was US$23.2 billion, an increase of 74% month-on-month (see Chart 6).
The demand for foreign exchange purchases in the market has driven the negative gap between domestic foreign exchange supply and demand to widen, and the ** Economic Work Conference reaffirmed the stability of the exchange rate
In November, the deficit of foreign-related receipts and payments of banks on behalf of customers continued to decline in the previous month, from US$18.5 billion to US$1.2 billion. In terms of sub-items, the surplus of foreign-related receipts and payments of goods narrowed by US$8.4 billion quarter-on-quarter to US$26.7 billion, but the surplus of investment turned from a deficit of US$13.1 billion for four consecutive months, contributing 140% of the month-on-month decline in the deficit of foreign-related receipts and payments of banks on behalf of customers (see Chart 7). In terms of currency, the renminbi's foreign-related receipts and payments deficit narrowed to US$6.3 billion for six consecutive months, while the foreign currency surplus fell to US$5 billion from US$8.8 billion in the previous month (see Chart 8).
In the same month, the average monthly onshore RMB spot exchange rate was 72269 to 1, ending the "six consecutive declines", compared with **11%。In the same period, the exchange rate after excluding the forward performance amount fell by 16 percentage points to 503%, but the exchange rate of foreign exchange purchases increased by 13 percentage points to 640%, the third highest since 2017 (see Chart 9), reflecting the increase in "bargain purchases" by market players in the context of RMB appreciation.
In November, the foreign exchange settlement and sale of forward (including options) of banks, which reflects the foreign exchange trading relationship between domestic banks and customers, continued to be in deficit since July, and the scale of the deficit widened from 18.8 billion yuan in the previous month to 24.9 billion US dollars. Among them, the deficit of spot foreign exchange settlement and sales increased from 7.5 billion yuan in the previous month to 24.6 billion US dollars, mainly because the deficit of foreign exchange settlement and sales of banks on behalf of customers increased from 8.1 billion yuan in the previous month to 23.3 billion US dollars, a new high since 2017, contributing to the increase of 247% of the total deficit of bank settlement and sales, while the bank's own foreign exchange settlement and sales turned from a surplus of 500 million US dollars to a deficit of 1.4 billion US dollarsThe cumulative unexpired amount of forward net foreign exchange settlement increased by $4.4 billion from a decrease of $5.4 billion in the previous month, and the decline in net foreign exchange settlement of unexpired option delta exposure narrowed to $4.7 billion from $5.8 billion in the previous month, and the total net foreign exchange of bank foreign exchange derivatives trading exposure increased by $10.9 billion month-on-month (see Chart 10).
The recently held 2023 ** Economic Work Conference emphasized "maintaining the basic stability of the RMB exchange rate at a reasonable and balanced level", which is consistent with the 2022 statement, and the ** Economic Work Conference in previous years only emphasized this expression in 2016 and 2017. In the past four years, in addition to the successful counterattack of the RMB exchange rate in 2017, the RMB spot exchange rate has fluctuated greatly in 2016, 2022 and 2023, with the largest amplitudes for the whole year respectively. 0% and 94% (see Chart 11).
The demand for forward foreign exchange settlement of market entities has increased, but the willingness to settle foreign exchange at spot has hit a new low in the same period in recent years
In November, the average 1-year RMBUSD forward swap narrowed by 59bp month-on-month to -2610bp, indicating an increase in the financial attractiveness of forward settlements (see Chart 12). In the same month, the contract amount of forward foreign exchange settlement was US$26.4 billion, an increase of US$10.4 billion month-on-month, and the forward foreign exchange settlement hedging ratio increased by 30 percentage points to 93%, reflecting the increased efforts of market players who have signed forward foreign exchange settlement contracts to guard against the risk of future RMB appreciation when the RMB exchange rate stops falling** (see Chart 13).
Since July 2023, the exchange rate of foreign exchange receipt, measured by the proportion of foreign exchange settlement of goods** in foreign-related income, has been significantly lower than the level of the same period in previous years (except for August), and the exchange rate of foreign exchange settlement has dropped to 47 in November3%, the lowest since March 2019 (see Chart 14). During this period, the overall willingness of the market to settle foreign exchange in July, September and November was also the lowest since 2018 (see Chart 9).
In addition to the increase in the proportion of RMB settlement in goods, which has reduced the demand for foreign exchange settlement (see Chart 15), the low exchange rate of foreign exchange settlement reflects that in the context of the pressure on the RMB exchange rate in the early stage, the motivation of merchants to postpone foreign exchange settlement is stronger. The subsequent trend of the RMB exchange rate may be supported by the release of foreign exchange settlement demand from the first business, but it still mainly depends on the economic and policy trends of China and the United States.
The impact of the "foreign exchange settlement tide" on the RMB exchange rate before and after the Spring Festival should not be exaggerated
For example, from November to January of each year since 2017, the RMB exchange rate has basically appreciated while the US dollar index has risen and fallen (see Chart 16). The market usually attributes this to the "foreign exchange settlement tide", that is, before the Spring Festival, enterprises to pay salaries, bonuses and other needs to settle a large amount of foreign exchange. Is that really the case?
As of January 2023, 17 of the 18 months from November to January 2017 have been appreciating. Among them, there were 11 months when the US dollar weakened and the RMB strengthened, such as in November 2023, indicating that the weakening of the US dollar is an important factor driving the appreciation of the RMB. In the other 6 months, the US dollar and the RMB rose together, especially in January 2021, when the "US dollar is strong and the RMB is stronger", and the RMB exchange rate in the month was **12%, which is greater than the increase of the dollar index by 06%, while the peak of foreign exchange settlement before the Spring Festival in 2021 was advanced to December 2020. In December 2020, the exchange rate of bank collection and settlement on behalf of customers, including forward performance, was as high as 706%, up 83 percentage points;Excluding forward performance, the exchange rate of bank collection and settlement on behalf of customers is 608%, up 86 percentage points (see chart).
In addition, judging from the exchange rate of foreign exchange settlement before and after the Spring Festival every year since 2018, the peak of foreign exchange settlement before and after the Spring Festival in each year (not the peak of foreign exchange settlement throughout the year, the same below) is concentrated from December to February of the previous year. Among them, 2018 appeared in February of the same year, 2019 and 2020 appeared in January of the same year, 2021 was advanced to December of the previous year, 2022 appeared in December of the previous year and January of the same year, and 2023 was postponed to February after the holiday (see Chart 17). On the contrary, the appreciation of the renminbi in November of each year does not correspond to the peak of foreign exchange settlement.
The willingness of foreign investors to allocate RMB bonds has increased significantly, and the net inflow of foreign capital under ** investment has generally resumed
In November, there was a net inflow of funds under Bond Connect (northbound) for three consecutive months, and the scale of net inflows increased month by month, with 17.8 billion, 42.2 billion and 251.3 billion yuan respectively, and the net increase in holdings in November was the second highest in history. According to the data of the Shanghai Clearing Exchange, the net increase in holdings of foreign institutions increased from 4.9 billion yuan in the previous month to 94 billion yuan, of which interbank certificates of deposit were the main contributors, and the net increase in holdings of foreign institutions rose from 5.8 billion yuan in the previous month to 86.8 billion yuan, which is related to the recent inversion of the interest rate on certificates of deposit and MLF interest rates. Historically, the 1-year interbank certificate of deposit interest rate is usually capped by the 1-year MLF interest rate, and since mid-October, the tightening of bank funds has pushed the certificate of deposit interest rate upward, and the average monthly interest rate difference between the MLF interest rate and the certificate of deposit interest rate has increased from -2 in the previous month1bp expanded to -94bp, the certificate of deposit configuration is more cost-effective. According to the data of China Bond Deng, foreign institutions have increased their net holdings for two consecutive months, with the net increase in holdings rising from 37.3 billion yuan in the previous month to 157.3 billion yuan, and the net increase in the scale of policy bank bonds from 29.2 billion yuan to 49.5 billion yuan in the context of the weakening of the inversion of the interest rate gap between China and the United States (the average monthly 10-year US bond yield spread has dropped from -211bp to -184bp) and the increase in favorable factors for China's economic development.
In November, the scale of net outflow of funds under the Mainland-Hong Kong Stock Connect (northbound) narrowed sharply to 1.8 billion yuan, while the average net outflow from August to October was 57.3 billion yuan12 of the 22 trading days in the month were net outflows, and the proportion of net outflow trading days fell to 55% from 81% in the previous month. In the same month, the net inflow of funds under the Hong Kong Stock Connect (southbound) continued to decrease, from 21.4 billion yuan in the previous month to 17.1 billion yuan, and after netting the difference with the cumulative net turnover of the Hong Kong Stock Connect, the net outflow of funds under the ** Stock Connect was 18.9 billion yuan, narrowing for three consecutive months (see Chart 21).
In November, the combined net outflow of foreign capital from 2.6 billion yuan in the previous month turned into a net inflow of 249.5 billion yuan. In the same month, the foreign-related receipts and payments of investment turned into a surplus of US$13.1 billion from the previous four consecutive months, and the foreign exchange settlement and sales of investment continued to be in deficit but narrowed by US$1.4 billion from the previous month to US$5.8 billion.
Risk Warning: Overseas financial risks exceed expectations, major central banks adjust monetary policies more than expected, and domestic economic recovery is not as expected.