Lian Pingwen
The direct impact of RMB exchange rate fluctuations comes from changes in the supply and demand of the foreign exchange market, and the changes in foreign exchange supply and demand are mainly driven by the balance of payments. What is the mechanism and path of the impact of the size and structure of the balance of payments on the RMB exchange rate? How will the balance of payments pattern change in 2023?
This paper analyzes the above issues, looks forward to the RMB exchange rate based on the open Taylor rule, and puts forward policy recommendations for balance of payments and exchange rate stability.
1. The impact of the scale and structure of the balance of payments on the RMB exchange rate
The balance of payments has a significant impact on the exchange rate. When the balance of payments surplus expands and the supply of foreign exchange exceeds demand in the market, the demand for RMB will rise, and the RMB will have upward pressure; On the contrary, if there is a deficit in the balance of payments, the supply of foreign exchange will exceed demand, and the demand for the RMB may weaken, and the RMB will face depreciation pressure. From the trend of the balance of payments and the RMB exchange rate since 2015, we can see that there is a significant negative correlation between the central parity of the USD/RMB exchange rate and China's balance of payments surplus (Figure 1).
For a long time, China's current account surplus has been the main source of the balance of payments surplus, and the size of its surplus has roughly synchronized with the appreciation and depreciation of the RMB exchange rate (Chart 2). Since 2015, the overall balance of payments surplus and the current account surplus have been basically in line with the trend. The current account includes four sub-items: goods, services, primary distribution and secondary distribution, of which the difference between income and expenditure of goods is the item with the largest change in the current account and is the main part of the current account surplus, and the surplus of goods accounted for 167% of the current account surplus last year.
Services have been in deficit for many years, but the total number of services is relatively low, about 153 per cent, with limited impact on the current account balance. In recent years, the primary distribution has continued to run a deficit, of which the highest proportion of investment income plays a major role, mainly because China absorbs a large scale of foreign direct investment, and the rate of return on foreign investment is higher than the rate of return on foreign investment, resulting in a continuous net outflow of foreign investment income. The secondary distribution, which mainly refers to international transfer expenditures, is relatively small, accounting for only about 4% of the total balance with the current account. It can be seen that the large surplus of goods is the main factor supporting the basic stability and strength of the RMB exchange rate.
*Investments and other investments reflect short-term cross-border capital flows, which may explain short-term fluctuations in the RMB exchange rate in most cases. In terms of bond investment, the widening (or contraction) of interest rate differentials between China and foreign countries has affected capital flows, driving the appreciation and depreciation of the RMB exchange rate (Chart 3). Nowhere is this more evident than in two periods. First, in the second and fourth quarters of 2020, the U.S. monetary easing drove its 10-year Treasury bond yield downward, and the difference between the yield of the 10-year Treasury bond between China and the United States increased from 13% widened to 25%, a large net inflow of capital under bond investment was about 151.9 billion US dollars, a year-on-year growth rate of 702%, and the RMB exchange rate appreciated by about 8% during this period. Second, in the first three quarters of 2022, as the Federal Reserve started to raise interest rates aggressively, the gap between the yields of 10-year Treasury bonds between China and the United States narrowed sharply and inverted, from 14% to -11%, the RMB bond holdings of foreign institutions for 8 consecutive months**, totaling 664.8 billion yuan, coupled with the domestic economy dragged down by the epidemic, the RMB exchange rate depreciated by about 106%。
In terms of investment, cross-border capital flows are realized through the Mainland-Hong Kong Stock Connect (i.e., northbound funds), which is mainly affected by market risk appetite and has a significant impact on the RMB exchange rate. Since 2015, there have been four net outflows of more than RMB40 billion in a single month from northbound funds, which were mostly due to the impact of risk events and directly triggered fluctuations in the RMB exchange rate (Chart 4). In May 2019, the escalation of the Sino-US war led to pressure on the RMB exchange rate, falling by about 30%；In March 2020, the global epidemic spread widely, the risk index of the United States market rose sharply, and the net outflow of northbound funds was 67.9 billion yuan, the lowest point since 2014, and the RMB exchange rate depreciated by about 26%；In March 2022, under the dual impact of the Russia-Ukraine conflict and the epidemic lockdown, northbound funds had a large-scale net outflow for several consecutive days, and the RMB ended its appreciation cycle, depreciating sharply by about 42%；In October 2022, under the influence of the Federal Reserve's aggressive interest rate hikes, the weaker-than-expected recovery of the domestic economy and the increase in real estate risks, northbound funds once again outflowed 57.3 billion yuan, and the exchange rate of USD/RMB exceeded 1:7 in the same month25。
In general, the balance of other investments is complementary to that of ** and direct investment, but other investments are more volatile, and the changes in their balances are not completely consistent with the trend of RMB appreciation and depreciation, and the impact on the RMB exchange rate is both pro-cyclical and adjustable (Chart 5). Other investments have been the most volatile among non-reserve financial accounts since 2020 (Chart 6) because the market entities under other investments come from commercial banks and other financial institutions. The capital behavior of these institutions may have market regulation or speculative purposes, and are affected by many factors, and the direction and scale of fluctuations are highly uncertain.
The changes in the assets and liabilities of other investments are mainly affected by the three sub-items of "Currency Deposits", "Loans" and "Credits". During the period from 2015 to 2016, China's export growth slowed down significantly, and the decrease in the current account surplus meant that the "currency deposits" and "credit" on the liability side decreased, that is, the net inflow of cross-border funds decreased. The increase in outward direct investment driven by the Belt and Road Initiative has led to an increase in "loans" on the asset side. In the end, the net outflow of cross-border funds under other investments coincided with the depreciation of the RMB exchange rate. However, during the 2020-2021 period, China's exports maintained a high boom, which not only increased the financing demand for "** credit", but also promoted the growth of the balance of foreign exchange deposits of "foreign exchange for the people" and financial institutions, which led to the expansion of "currency deposits" and "loans" on the asset side, that is, the increase in cross-border capital outflows. At this time, the outflow of funds from other investments is only the market adjustment behavior of financial institutions holding foreign exchange, and does not affect the trend of RMB appreciation brought about by strong exports and investment inflows.
2. In 2023, China's balance of payments may still maintain a pattern of "one forward and one negative".
What will be the aggregate and structural characteristics of China's balance of payments in 2023? Will the overall surplus pattern still be maintained? It is necessary to carry out an analysis.
1. The current account surplus may be reduced
In 2023, China's goods surplus may shrink. Global inflation remains high, stagflationary pressure in advanced economies increases, and banking risks in Europe and the United States are contagious, all of which will exacerbate the weakening of external demand. Since the beginning of the year, China's exports along the Belt and Road, ASEAN, Africa and other regions have grown brightly, but the continued downturn in the traditional markets of Europe and the United States is not conducive to the steady growth of exports, and Europe and the United States still account for about 28% of China's total exports. It is expected that the growth rate of goods exports may fall back to -2 this year0% or so.
Looking at imports, the current recovery of domestic demand is more concentrated in the service industry, the growth of commodity demand is relatively slow, and it will take time for imports to pick up. Primary products such as agricultural products and energy products account for about 42% of China's total imports, and this year's bulk commodities international ** is showing a downward trend, which has a limited role in supporting the amount of imports. At present, China's demand for high-tech intermediate products such as chips and diodes is high, but it has been hindered by export restrictions taken by the United States and other regions. It is expected that the growth rate of goods imports may drop to about -6% this year. Whether the surplus of import and export of goods can be converted into a surplus of goods ** also needs to consider the willingness of market entities to settle and sell foreign exchange.
Against the backdrop of the US dollar interest rate hike cycle, the average monthly exchange rate and purchase rate in 2022 are 54% and 55%, respectively, and the purchase rate is higher than the settlement exchange rate. In 2023, the Fed's monetary policy tightening will slow down, the US dollar interest rate will remain at a high level, and it is expected that the purchase rate will still be higher than the settlement exchange rate in stages, and the center may be around 55%-60%. From 2021 to 2022, the difference between revenue and expenditure of goods accounts for about 47% of the import and export surplus, and with reference to this ratio, according to the market adjustment law of "settlement of foreign exchange at high prices and purchase of foreign exchange at low prices", it is expected that the balance between revenue and expenditure of goods will be about 400 billion US dollars for the whole year.
In 2023, the scale of China's service deficit will expand. According to the balance of payments data, the average balance of payments** in 2015-2019 was -$250 billion, and the average in 2020-2022 was -$100 billion. This year, with the easing of overseas travel restrictions and the gradual resumption of study abroad and tourism, the scale of services** will return to pre-pandemic levels, and the deficit will expand marginally compared to the 2020-2022 average, and its size may be closer to the 2015-2019 average. The largest expenditure on imports in services** is concentrated in tourism and study abroad services, and the deficit of this item alone accounts for about 85% of the total deficit of services**. This year, the import demand for services may be released in a concentrated manner, but considering the orderly opening of entry and exit policies and the lag in the demand for foreign exchange for studying abroad, the deficit of services may be close to the pre-epidemic level, and it is expected that the annual service ** income and expenditure balance will be roughly the same as the average of 2015-2019, about -230 billion US dollars.
2. The deficit in the capital and financial accounts may narrow
In 2023, it will be difficult to increase the amount of direct investment, and the surplus may decline. The restructuring of the global industrial chain after the epidemic has shown two trends: first, labor-intensive industries and a few high value-added industries are entering Southeast Asia, and second, the industrial layout of developed countries in Europe and the United States is increasing cooperation with neighboring countries based on location considerations, such as Western Europe-Central and Eastern Europe, the United States-Mexico, etc. Based on this, the inflow of FDI this year is likely to be relatively limited. Although Europe started the "de-industrialization" process in the second quarter of last year and increased investment projects in China, based on the closer energy agreement between the United States and Europe, this year's European chemical energy investment is likely to tend to maintain an increase in the United States, while the increase in China tends to decline.
From November to December 2022, China's actual use of foreign capital was -36% and -32% year-on-year, the largest decline since 2010. While the inflow of direct investment has decreased, China's outflow of foreign direct investment has maintained a certain rate of growth. According to the balance of payments data, the average balance of direct investment in 2015-2019 was $40 billion, and the average in 2020-2022 was $108 billion. It is expected that the balance of payments for direct investment in 2023 will be significantly smaller than the average level of 2020-2022, but unlike the expansion of outbound investment expenditure of the Belt and Road Initiative in 2016-2017, the balance of income and expenditure of direct investment this year may be slightly higher than the average level of 2015-2019, which is expected to be about US$60 billion.
In 2023**, the investment portfolio may still be in deficit, but the domestic economic recovery has led to a narrowing of the deficit due to capital inflows. This year, under the influence of high inflation, the monetary policies of Europe and the United States have not made a clear turn, and the current interest rate differential between China and the United States is still in an inverted situation, and the net outflow of the bond market is difficult to reverse in the short term. However, due to the intensification of financial risk instability in Europe and the United States, the situation of foreign institutions on RMB bonds may gradually improve. From January to May, foreign-funded institutions had a total of 201.6 billion yuan of RMB bonds, a decrease of 142.9 billion yuan over the same period last year, and the outflow pressure of the bond market eased.
Under the exposure of overseas risks, there has been a significant net inflow of northbound funds since the beginning of the year, with a net inflow of 186 billion yuan in the first quarter, in sharp contrast to the net outflow of 24.3 billion yuan in the same period last year. In particular, overseas financial risks will further highlight the safe-haven advantages of RMB assets, which are expected to continue to attract cross-border capital inflows in the future. In March, regulators added more than 1,000 mainland-listed companies to the list that foreign investors can access through the Shanghai-Hong Kong Stock Connect. According to The Economist**, the move could bring in $60 billion in overseas capital inflows. Based on the contraction of net outflows from the bond market and the increase in net inflows from the ** market, it is expected that the overall net capital outflow of ** investments will be difficult to reverse in 2023. Its size is likely to be close to the level of around -600 in the 2015-2016 period, and the deficit in 2023** investment is expected to be around $80 billion.
In 2023, the assets and liabilities of other investments are likely to shrink roughly simultaneously, leading to a decline in the size of the deficit. At present, the Fed's interest rate level remains high, and the high cost of overseas funds may lead to a decrease in the inflow of "loans" and "credits" on the liability side, while the narrowing of the net export of goods and the net inflow of direct investment may lead to a decrease in the inflow of "money deposits" on the liability side. In the case of a decline in the scale of liabilities, the expansion of financial institutions' external assets will also be limited. According to the balance of payments data, the average balance of other investments in 2020-2022 is -150 billion US dollars, and in view of the regulatory role of commercial banks and other financial institutions, the scale of the deficit this year will be slightly better than the average level of 2020-2022, and the balance of payments of other investments is expected to be -1,300 US dollars in 2023.
To sum up, in 2023, China's balance of payments will show a pattern of "one forward and one reverse" and "balanced narrowing", which can achieve a basic balance. The current account surplus may reach US$170 billion, and the capital and financial account deficit is about US$150 billion, which will form a basic support for the stability and strength of the RMB exchange rate.
3. Analyze the impact of the balance of payments on the RMB exchange rate based on the "open Taylor-fundamentals" model
Based on the open Taylor rule model, this chapter selects seven representative explanatory variables to construct the "open Taylor-fundamental" model, and discusses its impact on the CNY RMB exchange rate (the central parity of the USD/RMB exchange rate). The explanatory variables are: DJI Dow Jones Industrial Index, SEI Shanghai Composite Index, CIR China 10-Year Treasury Yield, UIR U.S. 10-Year Treasury Yield, PPIUS US PPI Index, PPICHINA China PPI Index, and CEXP China Export Growth. Monthly observations from January 2015 to December 2022 were selected from the Wind database. The "open Taylor-fundamental" model has a good fitting effect and passes the significance test. Based on the above empirical results and combined with the actual trend of the exchange rate, the research on the impact of the balance of payments on the trend of the RMB exchange rate draws three conclusions.
Conclusion 1: The impact of capital flows in the bond market and the ** market on the RMB exchange rate is increasing. According to the empirical results, since 2015, the Shanghai Composite Index SEI, the Dow Jones Index DJI, the China 10-Year Treasury Yield CIR, and the US 10-Year Treasury Yield UIR, as key indicators affecting capital and financial accounts, have a high elasticity coefficient on the RMB exchange rate CNY, and the degree of influence is second only to the constant term. During the period of 2015-2016, China's cross-border capital outflow pressure was highlighted, with a quarterly outflow peak of nearly 80 billion US dollars, although the surplus of goods was strongly supported, but the balance of payments was in deficit due to the reduction of the balance of external reserves and the outflow of missing items, and the capital outflow once again strengthened the depreciation trend of the RMB, during which the RMB depreciated by about 14%. In 2022, under the external pressure of the Federal Reserve and other central banks to start raising interest rates strongly, the financial account faced large-scale capital outflows, with an average net outflow of US$83.8 billion in the quarter, which exacerbated the depreciation of the RMB, and the exchange rate of the US dollar against the RMB once exceeded 724 high.
Why does the factor indicators in the capital and financial account have an enhanced impact on the RMB exchange rate?
The first reason is that the degree of openness of capital and financial accounts has been continuously promoted. In 2014, China successively launched and implemented many innovative arrangements such as "Shanghai-Hong Kong Stock Connect", "Shenzhen-Hong Kong Stock Connect", "Panda Bonds" and "Bond Connect", and relaxed the restrictions on overseas investment and wealth management on behalf of financial institutions such as insurance and banks. In 2019, the restrictions on the investment quota of Qualified Foreign Institutional Investors (QFII) and Renminbi Qualified Foreign Institutional Investors (RQFII) were lifted, and the degree of two-way investment openness has also been greatly improved. At present, the number of completely non-convertible items has dropped from 90% to 10%, and the total number of partially convertible and basically convertible items has reached 90%.
The second is the promotion of the internationalization of the RMB. According to the statistics of the IMF and the State Administration of Foreign Exchange, in 2022, about 20% and 8% of global cross-border** and investment settlements will use RMB, and the share of RMB in international settlement will reach 32%, and the international payment of RMB accounted for 2 in April this year29%, accounting for 472%, an all-time high. With the gradual advancement of RMB internationalization, the marginal impact of overseas markets on RMB exchange has increased. In particular, the expansion of the fluctuation range of the exchange rate in the offshore market reflects the improvement of the market-oriented level of RMB exchange rate pricing.
Third, there is an "intrinsically strengthened" mechanism between capital flows and the RMB exchange rate. When the surplus (or even deficit) of capital and financial accounts weakens, the supply of foreign exchange decreases, and the RMB faces depreciation pressure, resulting in a shrinkage of asset valueThis will strengthen the expectation of RMB depreciation, enhance the motivation of investors to sell assets, and lead to increased pressure on capital outflow, which may form a cycle of "capital outflow - RMB depreciation - asset value shrinkage - increased depreciation expectation - increased capital outflow pressure - depreciation expectation further enhanced".
Conclusion 2: China's export expansion is conducive to the appreciation of the RMB. Since 2015, the pull of exports on the RMB exchange rate has been smaller than that of investment inflows. According to the empirical results, the regression coefficient of China's export growth rate CEXP to RMB exchange rate chy passes the significance test, but the coefficient is only -0002, the indicators that affect elasticity less than the capital and financial accounts.
Why has the influence of the export situation on the RMB exchange rate weakened since 2015?
There may be reasons for this, one is the change in the way money is delivered. Before 2014, foreign exchange accounted for one of the main ways of currency issuance in China, and due to the continuous passive purchase of foreign exchange, the proportion of foreign exchange accounted for about 83% of the total assets of the central bank. After 2015, the way of foreign exchange appropriation and currency was basically withdrawn, resulting in China's export situation playing little role in the supply of RMB, thereby weakening the impact on the RMB exchange rate.
The second is the promotion of the system of willing foreign exchange settlement and sales, and the willingness of market players to hold foreign exchange has increased. In 2008, China abolished the compulsory foreign exchange settlement and sales system and established a voluntary foreign exchange settlement and sales system. So far, the balance of foreign exchange deposits of commercial banks has increased by about six times, indicating that under the implementation of the system of willing foreign exchange settlement and sales, enterprises' willingness to hold foreign exchange has continued to increase, and the foreign exchange liquidity of commercial banks has continued to increase. However, the foreign exchange held by enterprises and commercial banks has not directly entered the market, and "foreign exchange is stored in the people", so it has little impact on the RMB exchange rate.
Conclusion 3: China's stable price level supports the RMB exchange rate. According to the empirical results, the impact coefficient of the US PPI index on the RMB exchange rate CNY is negative, and the impact coefficient of the Chinese PPI on the RMB exchange rate CNY is positive, and the regression coefficients of both have passed the significance test, which is consistent with the purchasing power parity theory in the exchange rate determinism, indicating that in the process of economic operation, high inflation is not conducive to the appreciation of the local currency, while low inflation supports the local currency. From 2020 to 2022, the cumulative CPI in the United States is about 131%, China's CPI cumulative ** is only 39%。
The U.S. dollar exchange rate appreciated by about 6 percent due to a sharp interest rate hike1%, and the RMB exchange rate depreciated slightly by about 11%。Since China's inflation level is relatively moderate, the RMB should appreciate against the US dollar by a corresponding amount. But against the backdrop of the Fed's aggressive tightening of monetary policy, the above problems are masked. When the Fed's tightening monetary policy is basically over, the relatively high intrinsic value of the renminbi against the US dollar will be reflected. Currently, inflation in the United States is 40%, while China's core CPI is -02%, so after the end of the Fed's interest rate hike process, a higher level of purchasing power will support the performance of the RMB exchange rate.
The overall balance of payments will show a surplus pattern, which will help the RMB exchange rate to remain basically stable.
First, the import-export balance is likely to improve. The WTO's global outlook for next year's commodity growth rate will reach 33%, significantly higher than this year's 08%, of which Asia's ** export growth rate next year will increase from 06% is up to 5 next year1%。Due to the advantages of China's stable industrial chain, under the influence of the low base effect, exports may improve next year, and the surplus of goods will lay the foundation for the current account surplus in the balance of payments, which will support the RMB exchange rate.
Second, the marginal narrowing of the interest rate differential between China and the United States may reduce the pressure on the RMB exchange rate. The probability of global central banks entering the interest rate cut cycle next year is relatively high, and the room for China's monetary policy easing is smaller than overseas, and the inversion of the interest rate differential between China and the United States may gradually narrow, driving the return of funds in the bond market. Thirdly, cross-border capital flows may be **. Next year, the US dollar interest rate will fall, the global risk appetite may improve in stages, and the financial work conference will make further arrangements for local debt, real estate and capital markets, and the uncertainty faced by the market may be weakened. The improvement of the domestic economic policy environment will attract overseas capital inflows, so that the balance of payments and financial capital account balance will support the trend of the RMB exchange rate.
Fourth, maintain a basic balance of payments and a basic stability of the RMB exchange rate
The basic balance of payments is to a large extent conducive to the basic stability of the renminbi exchange rate. To this end, effective measures should be taken in a multi-pronged manner to promote the basic balance of payments and the basic stability of the RMB exchange rate at a reasonable and balanced level, such as promoting stability and improving the quality of exports, opening up the capital account, supervising cross-border funds, reforming the exchange rate mechanism, managing exchange rate expectations, and managing the offshore RMB exchange rate.
Promote the high-quality development of goods and services**, and maintain a reasonable current account surplus. Accelerate the gradient transfer and upgrading of processing, and coordinate and promote the expansion and development of new formats and models such as cross-border e-commerce and overseas warehouses. We will continue to promote high-quality Belt and Road cooperation, and expand the implementation of connectivity and production capacity cooperation projects. Make full use of RCEP's tax incentives and facilitation provisions to promote the further release of policy dividends. Actively promote China's accession to CPTPP and DEPA, and promote the negotiation of the China-Japan-South Korea Free Trade Agreement and the China-ASEAN Free Trade Area 3Version 0 upgrade. Focus on promoting the upgrading of domestic productive services, especially the development of emerging services such as intellectual property rights, business services, financial services, and computer information services, expand the export income of services, narrow the deficit of services, balance the import and export of services, and enhance the ability of independent balance of payments. By promoting the stability and quality of goods and services, we will strive to maintain a certain scale of surplus under the current account, so as to lay a good foundation for the basic stability of the RMB exchange rate.
Promote cross-border investment and loan linkage to improve the quality of China's outbound investment. Transnational corporations are the main initiators and organizers of international direct investment, and they should actively expand foreign investment, improve the quality of investment, and lay a foundation for stabilizing foreign trade and balancing the balance of payments. In the development of infrastructure and industrial cooperation, we should play a key role in commercial banks, meet financing needs through multiple channels, strengthen cooperation between domestic and foreign branches, give full play to the functions of the offshore market, establish an investment and loan linkage mechanism, connect import and export with investment and loans, reduce the risk of foreign investment, and improve investment returns. In the process of linkage between investment and lending and import and export, we will promote the closed-loop of "borrowing-using-repayment" of cross-border loans in the form of RMB, and form a new model of RMB investment and financing that is convenient, safe and efficient, so as to improve the quality and efficiency of foreign investment.
Promote the opening of capital and financial accounts in a prudent and orderly manner. Rationally reduce the negative list for foreign investment access, further relax the entry threshold for foreign investment, and increase the opening up of the modern service industry. Optimize the business environment for foreign investment, ensure equal access to the domestic market for foreign-funded enterprises, and protect the legitimate rights and interests of foreign investment. We will further open up the financial sector, promote the opening of the bond market, promote the interconnection of the bond market, and open up trading channels for financiers and investors in various markets. Gradually expand the opening up of the investment sector, simplify the approval process, promote the facilitation of cross-border investment and financing, and broaden the channels for cross-border investment and financing. Focusing on serving the real economy, we will take the "Belt and Road", RCEP, and ASEAN 10+3 mechanism as breakthroughs to improve financial infrastructure, cultivate and expand market demand for cross-border transactions and use of RMB. Through the opening up of the capital and financial accounts, we will expand the channels for foreign capital inflows, and create conditions for the basic balance of payments.
Systematically strengthen the response to cross-border capital flow risks. The macro-prudential management system for cross-border financing should be improved under the new financial regulatory framework, so that the level of cross-border financing of market entities can be adapted to the macroeconomy, debt repayment capacity and balance of payments, and the risk of leverage ratio and currency mismatch should be controlled. In order to effectively prevent and control the abnormal flow of short-term cross-border capital, the upper limit of the leverage ratio of foreign exchange derivatives can be adjusted, the scale of foreign investors' remittance or remittance of investment principal and income can be reasonably restricted, the amount of QFII, RQFII, QDII and other quotas can be appropriately adjusted, and the Tobin tax can be set up on a pilot basis. Through systematic and strengthened regulatory measures, we will effectively control the risk of balance of payments fluctuations caused by capital flows, and maintain the basic stability of the RMB exchange rate.
Further deepen the market-oriented reform of the RMB exchange rate. The RMB exchange rate has formed a dual reference pricing model of referring to the "** price" and "exchange rate of a basket of currencies". It is necessary to deepen the market-oriented reform of the exchange rate, insist that the market plays a decisive role in the formation of the RMB exchange rate, pay attention to the guidance of expectations, enhance the flexibility of the RMB exchange rate, and give full play to the functions of the exchange rate to adjust the macroeconomy and the automatic stabilizer of the balance of payments. We will further improve the RMB exchange rate pricing mechanism, improve rules and transparency, and promote the RMB exchange rate formation mechanism to refer more to a basket of currencies. Enhance the flexibility of RMB exchange rate fluctuations in a timely manner, further expand the fluctuation range of the exchange rate, and make two-way exchange rate fluctuations the norm. It is necessary to actively guide market players to fully understand the characteristics of two-way fluctuations in the RMB exchange rate and the trend of RMB exchange rate system reform, and establish an awareness of "exchange rate risk neutrality".
Improve and enrich exchange rate risk management tools. According to the statistics of the People's Bank of China's regular policy briefing in April 2023, the hedging ratio of foreign exchange derivatives such as forwards and options used by enterprises in 2022 was 24%, an increase of 2% compared with 20214 percentage points, there is still a lot of room for improvement in the use of exchange rate risk tools by enterprises. It is necessary to improve the cost sharing mechanism of exchange rate hedging, and explore the introduction of policy-based guarantee companies, insurance companies and other institutions to realize the risk sharing of foreign exchange derivatives. Improve the bank-enterprise service platform of the China Foreign Exchange Trade System, and enhance the policy support for exempting foreign exchange derivatives related transaction fees for small, medium and micro enterprises.
There are problems such as high cost and limited variety of foreign exchange services provided by financial institutions, and there is still a gap between them and the actual needs of enterprises. Commercial banks should further improve and refine the system of derivatives products including forwards, foreign exchange swaps, currency swaps and options (ordinary European-style options and their combinations), reduce the transaction costs of financial derivatives, reduce the transaction costs of foreign exchange derivatives in an orderly manner, and enhance the willingness of enterprises to use exchange rate risk management tools. Enriching foreign exchange derivatives and improving the foreign exchange trading system can enhance the awareness of exchange rate risks of market players at the micro level, increase the effective use of foreign exchange derivatives, and control the negative impact of exchange rate risks on the real economy.
Strengthen the expectation management of the RMB exchange rate. China's prudential management mechanism for foreign exchange and capital flows is becoming more and more mature, and the timely introduction of foreign exchange management tools will be conducive to reducing the expectation of unilateral appreciation and depreciation. On the issue of adjusting the excessive appreciation and depreciation of the RMB, the monetary authorities have sufficient management tools, including but not limited to activating the countercyclical factor of the central parity of the exchange rate, adjusting the foreign exchange reserve ratio of financial institutions, adjusting the foreign exchange risk reserve ratio, issuing offshore central bills, and adjusting the macro-prudential adjustment parameters of cross-border financing of enterprises. Monetary authorities should combine the use of the above-mentioned tools to release policy signals in a timely manner with clear means to guide market expectations.
Accelerate the pace of building and improving the policy framework and behavior of offshore RMB exchange rate management. With the rise of "de-dollarization", the scale of cross-border use of RMB may grow rapidly, and the impact of the offshore market on the RMB exchange rate will further increase, while the management of the offshore market by China's monetary authorities may be "beyond the reach of the whip". When the offshore RMB exchange rate fluctuates significantly, how to effectively manage exchange rate risk may become an important issue to face. At the same time, it is necessary to conduct in-depth research on the characteristics of supply and demand in the RMB offshore market under the new pattern, as well as the new trend of RMB exchange rate operation, so as to more effectively grasp the trend of offshore exchange rate changes.