The narrowing of the interest rate gap between China and the United States and the surge of foreign exchange settlement by enterprises have formed a spiral of rising RMB exchange rates. In the medium and long term, the cross-border capital flows driven by changes in economic expectations between China and the United States have caused the RMB exchange rate to fluctuate in both directions
"Caijing" reporter Kang Kai
Edited by Yuan Man
With the breakthrough of important nodes one by one, the ripples caused by the RMB exchange rate have expanded round by round.
"This morning, I entered the trading room like a war, because the renminbi exchange rate finally rose above the key point. We had a hunch about this, and it only took a split second to really break the position. "On September 25, Lisa, a foreign exchange trader based in Shanghai, began to firmly position long positions in the yuan.
She told Caijing, "It is expected that this wave of appreciation cycle will continue." ”
On September 25, the offshore renminbi regained the 7.0 mark against the US dollar, reaching a high of 6.9993 for the first time since May last year. On the same day, the onshore renminbi closed up 167 points against the US dollar, hitting a new high in more than 16 months with the central parity. In the long run, in the past three months, the RMB exchange rate has risen by nearly 4%.
At the same time, onshore and offshore equity assets soared. On September 25, the three markets of Shanghai, Shenzhen and Beijing staged a general rise, with more than 4,100 stocks rising. On the same day, Hong Kong's Hang Seng Index rose 128.54 points, or 0.68%, to close at 19,129.1 points. The trading volume on the main board was HK$254.845 billion. On September 24, Eastern time, popular Chinese concept stocks rose, and the Nasdaq China Golden Dragon Index rose by more than 9%, the largest one-day increase since 2022.
The euphoria in the market continued into the last trading day before the holiday. On September 30, just 35 minutes after the opening of the market, the turnover of the Shanghai and Shenzhen stock markets exceeded 1 trillion yuan, setting a new record for the fastest transaction in history. The turnover of Wind All A exceeded the 2 trillion yuan mark for the first time since June 2015.
As of the close of trading on September 30, the Shanghai Composite Index was at 3,336.50 points, the highest closing price in nearly a year. In less than 10 trading days, the Shanghai Composite Index returned from 2,700 to 3,300 points. On the same day, the Shenzhen Component Index closed at 10,529.76 points, up 10.67%. The trading volume of A-shares was 2,593.1 billion yuan throughout the day, a record high.
In the external market, as of the close of trading on September 30, Hong Kong's Hang Seng Index was reported at 21,133.68 points, an increase of 2.43%, and the full-day turnover of the market was 505.838 billion Hong Kong dollars. In addition, foreign investors are running into the Chinese market. Goldman Sachs data showed that on September 24, Chinese stocks recorded the largest one-day net buying since March 2021, the second highest level in the past decade.
Behind this is the "booster" injected by regulation into the market. On September 24, the People's Bank of China (hereinafter referred to as the "People's Bank of China") launched three arrows at once: a comprehensive RRR and interest rate cut, an interest rate cut for existing housing loans, and an 800 billion yuan special capital stock market.
On the same day, the State Administration of Financial Supervision and Administration (hereinafter referred to as the "State Administration of Financial Supervision and Administration") announced that the state plans to increase the core Tier 1 capital of six large commercial banks, and plans to expand the pilot of bank equity investment.
Subsequently, stimulus policies have been accelerated. On September 26, the Political Bureau of the Central Committee of the Communist Party of China held a meeting, in response to the current economic growth challenges, the meeting put forward a comprehensive and systematic package of stimulus policy deployment, requiring to ensure the necessary fiscal expenditure, promote the real estate market to stop falling and stabilize, reduce the deposit reserve ratio, implement a strong interest rate cut, and deploy to boost the capital market. On September 27, the largest interest rate cut in the past four years landed, and the RRR cut released trillions of long-term liquidity. On September 29, Shanghai, Shenzhen and Guangzhou, three first-tier cities, implemented favorable policies for the property market.
However, on the other side of the coin, the rising RMB exchange rate caught foreign traders off guard, and the "tide of foreign exchange settlement" was frequent. According to data from the State Administration of Foreign Exchange (SAFE), in August, banks reversed their five-month deficits in foreign-related receipts and payments on behalf of customers.
In the view of market participants, whether foreign traders can better control exchange rate risks in the future depends on whether they can expand the use of RMB local currency, which is closely related to the internationalization of RMB. At present, with the improvement of RMB payment and the support of regulatory policies, the market is enthusiastic about RMB financing.
Looking ahead, the market remains optimistic about the RMB against the backdrop of strong regulatory stimulus in China and a weaker US dollar.
CICC believes that there is still a possibility of further rise in the RMB exchange rate in the short term, and the possibility of the RMB exchange rate rising further below 7.0 is not ruled out before the end of the year.
The reasons behind this are, firstly, because the Fed's further interest rate cuts will lead to a narrowing of the interest rate gap between China and the United States, and secondly, because the foreign exchange settlement demand of enterprises has not yet been cleared, and the demand for selling the dollar is still more before the end of the year.
UBS revised its forecast for the RMB to 7.1 against the US dollar at the end of the year, from 7.1-7.2 previously.
"In the medium to long term, changes in the RMB exchange rate depend on a variety of factors, including interest rate differentials between China and the United States, as well as cross-border capital flows driven by expected changes in the economies and financial markets of the two countries. Therefore, in the medium and long term, the RMB exchange rate may show a two-way fluctuation trend of ups and downs according to changes in market supply and demand. CICC said.
Hundreds of billions of dollars in foreign exchange settlement
"7.3, 7.2, 7.1, 7.0......" Looking at the numbers jumping in the foreign exchange market every day, Ding Yandong, general manager of Ningbo Ruimax Door and Window Accessories Co., Ltd., regretted it. After all, if you settle the foreign exchange a few days early, you can save millions of dollars in costs.
"Even if customer demand is strong, the appreciation of the exchange rate exposes me to the risk of 'doing nothing'. In the past few months, millions of dollars have been swallowed up in the profits of our business. Many of my friends who do foreign trade have begun to settle foreign exchange urgently, and they will settle when they see a good point, although they may not be accurate, but they can lose a little less. He told Caijing.
There are not a few foreign traders who hold such ideas. According to data from the State Administration of Foreign Exchange, in August, banks earned US$598 billion in foreign-related income and US$582.6 billion in external payments, recording a surplus of US$15.3 billion, reversing the previous five consecutive months of deficits, according to data from the State Administration of Foreign Exchange.
The rapid rise in the renminbi exchange rate caught the once-depreciating market off guard. Under the principle of "actual demand", the foreign exchange market has a limited number of trading entities, and it is easy to form consensus expectations, which makes it easy to form "panic purchases" when the RMB depreciates, and "stampede foreign exchange settlement" when it appreciates.
Driven by factors such as the demand for foreign exchange settlement, the foreign exchange market has long been moved. After July, the RMB exchange rate accumulated upward momentum. August 30 was one of the most active days in the market recently, when the onshore renminbi rose more than 220 points against the US dollar, hitting a 15-month high.
Goldman Sachs, ANZ Bank, Barclays Bank and other institutions estimate that in the past two years, Chinese exporters have accumulated about $400 billion to $600 billion in unsettled foreign exchange earnings.
According to Morgan Stanley's estimates, in July, the proportion of foreign exchange settlement by Chinese exporters was at a record low of 13.5%. This means that for every $100 of export revenue received, Chinese companies convert only $13.5 into RMB.
Some traders also said that if we look at the trading situation in August, it is expected that the pending scale of the foreign exchange market will be net digested by about 100 billion US dollars in a single month.
The reason why there is a large amount of unsettled foreign exchange retention market is mainly because the Fed's interest rate cut cycle has been repeatedly postponed, and the US dollar has continued to strengthen, after the RMB exchange rate depreciation is expected to be stronger.
Not only that, due to the high interest rate on U.S. bonds, Chinese companies can also earn higher returns on the foreign exchange hoarded by foreign wealth management and investment.
According to the 2023 annual report of the listed company Lake Electric, the company's interest income was 291 million yuan that year, and the monetary funds held by the company at the end of the year were about 5.888 billion yuan, of which nearly nine became US dollar deposits. In addition, foreign currency wealth management is also a common investment method.
With the appreciation of the renminbi, the risk of not locking up foreign exchange has gradually emerged. Ningbo Huaxiang said that the company's exchange loss in the first half of the year was 39 million yuan, and the exchange gain in the same period last year was 45 million yuan, a difference of nearly 84 million yuan. According to Zhejiang Dingli's data, there was an exchange loss of 40 million yuan in the first half of the year, compared with an exchange gain of 156 million yuan in the same period last year.
To a certain extent, this has dampened the profits of foreign traders. "For us, it would be very dangerous if we couldn't guarantee a net profit of more than 5%. If the exchange rate fluctuates greatly, the company's profits may be lost. Ding Yandong said.
Many market participants believe that it is not yet known whether there will be a wave of foreign exchange settlement in the future. "Only when the carry situation changes, or when it is believed that the dollar is in a downward trend, the foreign exchange hoarded by foreign trade enterprises may be released in large quantities, and there are still many uncertainties about the level and speed of the current dollar and US bond interest rate correction." Zhou Hongli, a senior economist at DBS Bank, told Caijing.
As of now, the yield spread between China and the United States on 10-year Treasury bonds is still around 170 basis points. Most of the US dollar deposit rates of many banks in Hong Kong are between 3% and 4.9%.
Xu Xijie, general manager of Deutsche Bank's corporate foreign exchange management department in Greater China, told Caijing that during the period of RMB exchange rate appreciation, foreign exchange settlement is a common behavior of foreign trade enterprises. However, the behavior of enterprises generally does not quickly change the proportion of deposits and increase the settlement of foreign exchange due to changes in foreign exchange or interest rate policies, and their decision-making is still based on the foreign exchange policy of enterprises and the outlook of the financial market throughout the year.
"In terms of exchange rate risk management, if the exchange rate appreciates further, it is expected that some enterprises are not in a hurry to settle foreign exchange immediately. First, some funds may make further overseas investments to maintain the normal operation of overseas continuous investment projects. Second, in the context of the absence of a significant unilateral appreciation of the RMB, the yield of the US dollar is still attractive, and the diversified choice of US dollar investment products can also further improve the income and extend the term for enterprises. She said.
Xu also said that for the part of overseas exports receivable in the future, the proportion of hedging and foreign exchange settlement will be increased. As expectations change, the spot settlement ratio is expected to increase accordingly in order to avoid the impact of foreign exchange losses on the income statement.
Ding Yandong said that a sharp rise or depreciation of the RMB exchange rate will affect foreign trade business. Exchange rate appreciation may hurt profits, and exchange rate depreciation customers will ask for price reductions. "What we want most is exchange rate stability." He said.
Some traders said that 7.1 may be its important settlement point, because the foreign exchange profit and loss is flat at this time, even if there is no hedging, there is no loss. "When we look at the income statement, we will refer to the central parity of the RMB exchange rate at the end of last year, or the standard of the accounting exchange rate on our own statements. At the beginning of the year, the central parity of the RMB exchange rate was 7.07. He said.
The RMB exchange rate broke 7
Behind the tide of foreign exchange settlement, the RMB exchange rate is soaring, and the two are each other's surface, forming a rising spiral.
In Zhou Hongli's view, the future trend of the RMB exchange rate is the key to determining the psychology of foreign trade merchants. In addition, according to the estimate of China Securities Construction Investment, if the backlog of foreign exchange settlement demand is released in a concentrated manner, about 10 billion US dollars of foreign exchange settlement funds will support the appreciation of the RMB exchange rate by 1,000 points.
On the morning of September 25, the onshore RMB exchange rate against the US dollar narrowed its rise after approaching the 7 mark, and the offshore RMB exchange rate against the US dollar once rose above 7, hitting a high of more than 16 months; The central parity of the RMB exchange rate also refreshed a high of more than 16 months.
In the view of some traders, China's financial stimulus policy "gift package" is boosting market sentiment, coupled with the weak performance of the external US dollar, the short-term yuan is expected to remain strong. "The internal and external environment are more friendly to the trend of the RMB, and the RMB exchange rate may continue to rise in the future."
CICC believes that there is still a possibility of further rise in the RMB exchange rate in the short term, and the possibility of the RMB exchange rate rising further below 7.0 is not ruled out before the end of the year.
The reasons behind this are, firstly, because the Fed's further interest rate cuts will lead to a narrowing of the interest rate gap between China and the United States, and secondly, because the foreign exchange settlement demand of enterprises has not yet been cleared, and the demand for selling the dollar is still more before the end of the year.
UBS revised its forecast for the RMB to 7.1 against the US dollar at the end of the year, from 7.1-7.2 previously.
Market participants generally believe that the trend of the RMB exchange rate, from the perspective of domestic factors, lies in whether the stimulus policy is gradually increased, and the subsequent recovery of China's economic fundamentals; From the perspective of international factors, it is necessary to pay attention to the process of the Fed's interest rate cut and the direction of the United States election.
On September 24, the People's Bank of China launched three arrows. First of all, it is an all-round RRR and interest rate cut. That is, the reserve requirement ratio will be lowered by 0.5 percentage points, and the interest rate of the 7-day reverse repo operation of the main policy rate will be lowered by 0.2 percentage points, and the LPR (loan prime rate) and deposit interest rates will be lowered simultaneously.
Secondly, the interest rate of existing housing loans will be reduced. We will guide commercial banks to reduce the interest rate on existing housing loans to around the interest rate on new loans, and unify the minimum down payment ratio for first and second home loans at the national level to 15%.
Thirdly, two structural monetary policy tools were created, namely "securities, funds, and insurance company swap facilities" and "special relending for stock repurchase and increase holdings", with an initial quota of 800 billion yuan to provide liquidity support for the stock market......
Pan Gongsheng, governor of the People's Bank of China, said that the central bank's monetary policy adjustment mainly has four considerations: one is to support the stable growth of China's economy, the second is to promote a moderate recovery in prices, the third is to take into account the support for real economic growth and the health of the banking industry itself, and the fourth is to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.
In addition, in the case of the continuous narrowing of the bank's net interest margin, on September 24, Li Yunze, director of the State Administration of Financial Regulatory Commission, said that the national plan to increase the core Tier 1 capital of six large commercial banks will be implemented in an orderly manner in accordance with the idea of "overall promotion, phased and batched, and one bank and one policy".
Li Yunze further said that the financial asset investment companies under large commercial banks already have the conditions to expand the equity investment pilot. "We will work with relevant departments to study the expansion of the pilot scope from the original Shanghai to 18 large and medium-sized cities with active scientific and technological innovation such as Beijing, appropriately relax the restrictions on the amount and proportion of equity investment, increase the proportion of on-balance sheet investment from the original 4% to 10%, and increase the proportion of investment in a single private equity fund from the original 20% to 30%, guide relevant institutions to implement the requirements of due diligence and exemption, and establish and improve long-term and differentiated performance appraisal."
On September 26, the Political Bureau of the Central Committee of the Communist Party of China held a meeting, in response to the current economic growth challenges, the meeting put forward a comprehensive and systematic package of stimulus policy deployment, requiring to ensure the necessary fiscal expenditure, promote the real estate market to stop falling and stabilize, reduce the deposit reserve ratio, implement a strong interest rate cut, and deploy to boost the capital market.
On September 27, the largest interest rate cut in the past four years landed, and the RRR cut released trillions of long-term liquidity.
On September 29, China implemented favorable policies for the property market, Guangzhou fired the "first shot" of the comprehensive liberalization of purchase restrictions in first-tier cities, and Shanghai and Shenzhen both said that they would allow more buyers to buy houses in the suburbs and lower the minimum down payment ratio for first and second homes.
The launch of this round of financial, capital market, real estate and other combinations aims to effectively boost the economy. According to the National Bureau of Statistics, China's total retail sales of consumer goods increased by only 2.1% year-on-year in August, down from the 2.7% year-on-year growth rate in July. In August, the growth of industrial added value fell by 0.5 percentage points year-on-year to 4.5%, and from January to August, fixed asset investment increased by 3.4% year-on-year, which was also lower than the 3.6% growth rate from January to July.
Judging from financial data, new loans in August were 900 billion yuan, a year-on-year decrease of about 460 billion yuan.
CICC believes that the impact of the above-mentioned policy "combination punch" is that, firstly, the interest rate cut will reduce the interest payment burden of the real economy by about 690 billion yuan. Second, the principal repayment pressure has been on the rise in recent years, and the loan renewal policy can help substantially reduce the cash flow risk. Thirdly, the RRR cut will not only meet the current demand for credit expansion and existing fiscal strength, but may also be used to partially replace the MLF (medium-term lending facility), or may prepare for potential fiscal strength.
The agency also said that the structural monetary policy tool created by the People's Bank of China for the first time is used to support the stock market. Monetary policy adjustments, coupled with financial regulatory and capital market reform measures, have had a positive impact on stock market expectations. In addition, real estate-related policies continue to alleviate liquidity constraints from both the demand side and the supply side.
Goldman Sachs said in a report released on September 24 that the policy rate and the reserve requirement ratio were cut at the same time, marking the arrival of a new round of policy easing in China. In the fourth quarter, the People's Bank of China (PBOC) is expected to cut the reserve requirement ratio by another 25 basis points. In 2025, the reserve requirement ratio will be cut by 25 basis points each and the policy rate by 10 basis points each for two cuts.
The bank believes that a 50 basis point cut in the reserve interest rate could inject about 1 trillion yuan into the banking system.
Wang Tao, head of Asian economic research and chief China economist at UBS, said that the PBOC's interest rate cut was slightly larger than expected, and the government's move to increase core Tier 1 capital supported the banking system, and the above measures, combined with more effective fiscal policy support, helped support a slight rebound in growth momentum during the year.
In the long run, from July to the end of September, the onshore RMB exchange rate appreciated by 4%, rebounding for three consecutive months. Behind this, the relaxation of external constraints is the main motivation.
On September 18, local time, the Federal Reserve decided to cut interest rates by 50 basis points, bringing the benchmark federal funds rate to between 4.75% and 5%, a decline higher than the 25 basis points expected by the market. This means that, after a gap of four years, the Fed has started a cycle of interest rate cuts at a bolder pace.
Tse Dongming, head of Greater China Research at OCBC Bank, told Caijing that the reference comparison of the United States economy has shifted from the "anti-inflation" of the Volcker era to the "soft landing" stage of the Greenspan era, and the current Fed Chairman Powell is more flexible and decisive than Greenspan's gradual continuous 25 basis point rate cuts.
Donald Kohn, a former vice chairman of the Federal Reserve, has worked for the Fed for 40 years and has had in-depth contacts with former Fed chairmen such as Volcker, Greenspan, and Powell. In an interview with Caijing in early September, he argued that even if the market repeatedly believes that a recession is imminent, the United States economy is expected to achieve another "soft landing". That's because the Fed has just started cutting interest rates at a time when the labor market is cooling.
This ignited sentiment in the market, which saw the Fed's move as a "precautionary rate cut" intended to "take precautions".
On September 19, the day after the Fed cut interest rates, Asia-Pacific stock markets surged significantly, with the Nikkei 225 Index surging nearly 3%, and the Shanghai Composite Index and the Hang Seng Index both climbing nearly 1%.
External pressures in emerging markets have similarly eased. On 19 September, the Hong Kong Monetary Authority of China announced a 50bp cut in the base rate to 5.25%, its first rate cut in four years. HSBC, one of Hong Kong's note-issuing banks, announced that it will cut the interest rate on US dollar savings accounts by 25 basis points from September 20.
According to traders, in the process of RMB appreciation, regulatory regulation can also be glimpsed. For 14 consecutive trading days since August 20, the deviation between the central parity of the RMB against the US dollar and the average value of the Bloomberg survey has been less than 100 points, and the frequency of strength and weakness is similar. In addition, during the period of rapid appreciation of the renminbi, some major Chinese banks bought a large number of US dollars.
Exchange rate hedging measures have been upgraded
What is certain is that two-way fluctuations in the renminbi have become the norm.
Correspondingly, in addition to foreign exchange settlement, exchange rate hedging has also become a common hedging behavior of market players. "Hedging is the pre-management of part of the future accounts receivable by enterprises, such as locking in the depreciation of the US dollar against the RMB through forward products, and we foresee that the proportion and demand for hedging will increase." Xu Xiaojie said.
Zhou Hongli also said that in order to avoid exchange losses, foreign traders can use derivatives such as forward contracts or options to hedge risks to lock in exchange rate prices.
According to data from the State Administration of Foreign Exchange, China's foreign exchange market (excluding foreign currency pairs) totaled US$3.92 trillion in July, a record high and up 25% month-on-month. From a structural point of view, the foreign exchange swap market and the spot market, as the main foreign exchange markets, contributed the most to the growth of the month's trading volume, increasing by US$305.3 billion and US$449.3 billion respectively from the previous month.
In the same month, the forward market volume increased by nearly 33% year-on-year, far exceeding the year-on-year growth rate of the total foreign exchange market turnover. However, the volume of the forward market is much lower than that of the swap market.
As for how much foreign exchange purchase costs can be saved by foreign exchange forward products, Lisa helped Caijing calculate such an account. When the exchange rate is around 7.04, if a forward contract is signed with a bank, it is estimated that the exchange rate of the company to buy dollars after one year can be around $6.80 based on the previous swap point of -1800, all other factors being equal. If the total amount of payment received by the enterprise is US$1 million at the beginning, the initial return of RMB will be about 7.04 million yuan, and the subsequent cost of foreign exchange purchase will be about 6.8 million yuan.
"The forward exchange rate of RMB is the spot exchange rate plus or minus the premium. With the Fed cutting interest rates, it is not so cost-effective to buy forward products in the future. The use of foreign exchange forward products carries the subjective judgment of banks and foreign traders on the foreign exchange market. Lisa said.
"For foreign exchange swap products, companies are mainly to allocate idle dollar funds." Lisa further said, "The application scenario of the enterprise is to receive a payment in US dollars and need to exchange it for RMB, but still need to buy US dollars after many months. ”
She also explained that at present, the strategy adopted by the market to use swap products is mainly "near-end foreign exchange settlement, remote foreign exchange purchase". Now it seems that the RMB exchange rate at the far end is low because the US dollar interest rate is high and the RMB interest rate is low. In swaps, banks compensate customers for this part of the spread.
This also reflects another function of foreign exchange swap contracts - financing. It can be understood colloquially as a "loan". A USD/CNY "buy near and sell far away" swap contract "borrows" a sum of US dollars at a price denominated in RMB, and then "returns" the same amount of US dollars at a pre-agreed price at maturity.
In fact, since September 2023, foreign investors have been long Chinese onshore bonds for more than ten consecutive months, taking advantage of the function of foreign exchange swap products.
"From a spread perspective, the return on investing in China's bond market may be relatively low compared to the U.S. bond market, but the return of foreign exchange hedged investors long onshore short-term bonds is still considerable, which helps foreign capital flow back to China's bond market. The current inversion of the interest rate differential between China and the United States is the fundamental reason for the sharp discount of the USD/RMB swap point. Lisa said.
In Xu Xijie's view, at present, the concept and operation of foreign exchange hedging of many Chinese-funded enterprises have been very mature, and many enterprises are using RMB financing and foreign exchange swap products. "How to optimize the financing structure in the future, including the choice of financing currency, the consideration of financing costs, and the combination of various currencies when going overseas, are also aspects that enterprises are generally concerned about." She said.
This is related to the gradual establishment of the concept of "exchange rate neutrality" by foreign exchange market players. Li Hongyan, deputy director of the State Administration of Foreign Exchange, recently disclosed that there are more than 40 tradable currencies in China's foreign exchange market, and the trading varieties have also covered international mainstream foreign exchange products. In the first seven months, the total turnover of China's foreign exchange market was close to 23 trillion US dollars, a year-on-year increase of 8.7%; During the same period, more than 20,000 merchants handled exchange rate hedging for the first time, helping more enterprises to use foreign exchange derivatives to better manage exchange rate risks.
However, compared to large enterprises with hedging financial systems, small and medium-sized enterprises have low profit margins and no pricing power in the international market, and the cost of "hedging" is also unaffordable.
"At present, when banks handle forward foreign exchange settlement and sales business for corporate customers, they will require customers to have corresponding credit lines or pay a certain percentage of the initial margin for transactions. The margin for large customers is generally 3%-5% of the nominal principal, and the margin ratio for small and medium-sized customers is usually 5%-10%, and the margin is generally calculated according to the bank's benchmark interest rate, which is much lower than the current actual capital income. Some foreign traders said.
"I signed a forward foreign exchange purchase agreement with the bank, and I needed to deposit a deposit of several million yuan in the bank, which was based on the interest on the fixed deposit. When the company's funds are tight, this part of the money cannot be used, and it has to take additional loans, which occupies a lot of funds. He further said.
Lisa said that at present, enterprises still have to pay foreign exchange reserves for foreign exchange purchases, which increases their forward foreign exchange purchase costs. "It's a little better for them to use FX options for hedging."
The current market situation is similar to that of 2015 and 2016. But Xu has noticed a noticeable change, more and more customers are using foreign exchange forwards, options and other methods to lock in exchange rate costs. "This shows that the concept and operation of foreign exchange risk of Chinese enterprises have been very mature, and the market is gradually establishing the concept of 'exchange rate neutrality'."
Broaden the scenario of RMB internationalization
In the view of market participants, the key to exchange rate risk control is to use the local currency as much as possible. "Even if Chinese-funded enterprises go out, the accounting currency is still RMB. The most fundamental way for enterprises to increase the use of cross-border RMB and use scenarios as much as possible and reduce foreign exchange conversion is the most fundamental way. Yuan Quan, head of UOB's Chinese mainland and Hong Kong transaction banking business and president of the Shanghai branch, told Caijing.
The main use scenarios of cross-border RMB include payment, financing, investment, etc. Against the backdrop of low RMB interest rates, RMB credit has recently accelerated its "going overseas". As of August, the balance of RMB external loans was 1.85 trillion yuan, a year-on-year growth rate of 48%. From April to August, new RMB overseas loans totaled RMB429.3 billion, accounting for 8.6% of the new loans in the same period, much higher than the pre-pandemic proportion of about 1%.
In Zhou Hongli's view, in the context of the widening interest rate gap between China and the United States, RMB financing is still the most direct and more attractive option.
If the exchange rate and interest rate are only cyclical factors for RMB financing, then in the long run, the increase in RMB payment is an important reason behind it.
Since 2019, the share of China's foreign-related receipts and payments has continued to increase in RMB. According to data from the People's Bank of China, in the first quarter of 2024, nearly 30% of all cross-border settlements of China's trade in goods (including imports and exports) were settled in RMB.
According to data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), in August, the renminbi remained the world's fourth most active payment currency, accounting for 4.69% of total global payments. However, the amount of RMB payments decreased from the previous month in July.
"It is possible that the trade at both ends of the enterprise is based on two currency arrangements, and the front-end trade is often in foreign currency. If the front-end trade of enterprises shifts the contract settlement currency from foreign currency to RMB, it can reduce exchange rate risk and financing costs. This requires coordination with the counterparty and adjustment of the profit distribution between the two parties. Yuan Quan said.
In addition, institutional escort is also a pair of hands that cannot be ignored. In 2022, the People's Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) jointly implemented relevant regulations to allow domestic banks to directly carry out RMB loan business to overseas enterprises.
From a regional perspective, the Belt and Road Initiative and emerging market countries are becoming a new direction for China's exports, which provides new use scenarios for cross-border RMB payment and financing.
In ASEAN, UOB has helped companies achieve direct conversion and hedging of RMB with Southeast Asian currencies. "Now enterprises can use RMB to directly exchange local currencies in Southeast Asia without having to exchange them for US dollars first, which reduces secondary exchange operations and reduces corporate transaction costs and the risk of exchange rate fluctuations." Yuan Quan said.
In the Middle East, in October 2023, Deutsche Bank China provided the industry's first RMB cross-border financing for CLP International's refinancing project in San Simão, Brazil, using onshore RMB financing and RMB and Rreal cross currency swap transaction structure to meet the dual needs of enterprises for RMB loans and foreign exchange rate risk management.
In fact, the renminbi has become the main currency for China's cross-border trade settlements with other countries, especially in the ASEAN trade corridors. This makes the use of RMB in payment and settlement, valuation, investment and financing integrated with supply chain finance, and jointly helps the internationalization of RMB.
"The renminbi is gradually becoming an international settlement currency, and its use in supply chain finance is becoming more and more extensive, such as oil trade. For companies in the Middle East and Southeast Asia, they may need to realize the flow of supply chain finance denominated in RMB and need good offshore RMB services. DBS Group Chief Executive Officer Paul Ghumford told Caijing.
In 2014, DBS China joined the Chinese Cross-border Payment System (CIPS). As of March 2024, the bank's CIPS transaction volume increased by 67% year-on-year. As an important clearing bank in the Singapore market, the bank has continuously strengthened CIPS as an important financial infrastructure for RMB internationalization. Singapore is one of the internationally important offshore RMB centers.
In Hong Kong, another important hub for offshore renminbi, the issuance of offshore renminbi bonds continues to heat up. Recently, the Guangdong Provincial Government and the Shenzhen Municipal Government have both successfully issued RMB local government bonds in Hong Kong. HSBC acted as joint global coordinator and bookrunner in the issuance.
Kim Nam Yiu, co-head of debt capital markets for Asia Pacific at HSBC's investment bank, said the move would help establish an important benchmark for the issuance of longer offshore renminbi bonds in the future. At the same time, the overwhelming response from Bond Connect Southbound and offshore investors also reflects investors' confidence in the Shenzhen government's credit rating and its commitment to promoting ESG development.
On September 24, Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, said that Hong Kong is a global offshore RMB business hub, with the world's largest offshore RMB liquidity pool, providing sufficient liquidity for the dim sum bond market. In the first half of the year, Hong Kong's dim sum bond issuance reached 465.7 billion yuan, an increase of 28% year-on-year, continuing the rapid growth in the past few years. Dim sum bonds refer to renminbi-denominated bonds issued in Hong Kong, and the mainstream investment channels of dim sum bonds include "Southbound Trading", QDII, RQDII, etc.
However, in Yuan Quan's view, the use scenarios of overseas RMB still need to be further broadened in the future, which requires an increase in the variety of RMB-denominated products.
"For example, in the future, if enterprises want to do RMB L/C rediscounting, if they can successfully manage financing costs, foreign trade enterprises can be more bold to use RMB international trade financing." He said.
In recent years, the number of RMB-denominated products has continued to expand. In 2023, HKEX officially launched the HKD-RMB Dual Counter Model. HKEX Chief Executive Anthony Chan said that the institution is preparing a 10-year Treasury bond futures contract product in the near future.
In the future, whether Chinese-funded enterprises and foreign-funded enterprises will use RMB in the fields of payment and settlement, pricing, investment and financing, the RMB exchange rate is also a factor that cannot be ignored.
From the perspective of the Chinese factor, it is necessary to pay attention to how China's domestic fundamentals stabilize after the PBOC launches a "combination punch".
Wang Tao suggested that after the introduction of this round of policies, it is still necessary to further increase the policy in the next few months. In order to make significant progress in destocking real estate, the Chinese government and the central bank need to significantly increase financial support and reduce the cost of capital. In addition, it is necessary to further expand the "white list" mechanism to support the delivery of buildings. Not only that, but it is also necessary to speed up the pace of treasury bond issuance and fund allocation, and support local governments by relaxing local implicit debt control to a certain extent. More effective fiscal support is expected to be introduced by the government in the coming months.
From the perspective of external factors, it is necessary to pay attention to the pace of interest rate cuts by the Federal Reserve. Slightly more than half of officials expect to cut rates by at least 25 basis points at their November and December meetings, according to quarterly forecasts released by the agency.
"To prevent a continued weakening of the labor market, the Fed may cut interest rates by about 150 basis points over the next five quarters." Cohen said.
However, Zhang Jiantai, chief foreign exchange strategist of Mizuho Bank in Asia, reminded Caijing that although the Fed's interest rate cut is good for the RMB exchange rate, the interest rate gap between China and the United States has not reversed significantly, and the United States presidential election may bring unfavorable factors, and it is expected that the RMB appreciation channel will also be blocked in the short term.
(Caijing reporters Tang Jun and Chen Hongjie also contributed to this article; At the request of the interviewee, Lisa is a pseudonym; The author is a reporter for Caijing; This article was published in the September 30, 2024 issue of Caijing magazine)
Cover design|Li Li
Editor-in-charge | Zhou Jin