December 14 – The funds outstanding for foreign exchange of the Central Bank of China became regular for the first time in November after nine consecutive drops. The monthly increase was the largest in 28 months, but the absolute change was still at a very low level. Can such a small positive increase be interpreted as regulatory intervention? Some analysts also believe that this may be related to the large fluctuations in the US election-day exchange rate, which is not sustainable.
“It’s a weird positive number. If it weren’t for the intervention, how could it be positive; But if it’s intervention, what does it do on this scale, “said one banker.” You can keep watching to see if there are consecutive positive numbers.”
China’s central bank increased its foreign exchange outstanding balance by 5.931 billion yuan in November to 21.16368 billion yuan at the end of the month after a nine-month decline. An increase of 5.9 billion yuan, or less than $1 billion to the dollar, hardly makes for an intervention on the scale of $821.3 billion in spot yuan/dollar transactions in November.
Some bank traders also speculated that the CENTRAL bank might provide a moderate amount of us dollar liquidity to avoid excessive exchange rate volatility during the us election in November. But this should be an isolated case and not sustainable.
The onshore yuan also fluctuated wildly in response to the convoluted U.S. election on November 4, with a spot peak of 6.65 and a low of 6.7537, with a median amplitude of more than 1,000 points.
“The positive growth of 5.9bn is actually a very small fluctuation, which cannot be linked to the central bank’s intervention and should only be a disturbance of the balance,” said Xie Yaxuan, chief macro analyst at China Merchants Securities.
The U.S. benchmark index fell 2.31 percent to 91.869 in November, while the yuan rose 1.78 percent against the dollar at a spot rate to 6.5827, a six-month gain that was small compared with other non-U.S. currencies. Separately, China’s foreign exchange reserves rose a net $50.6 billion in November, the biggest monthly gain in seven years, adding to speculation that the central bank might intervene.
Li Liuyang, chief foreign exchange analyst in the financial market department of China Merchants Bank, also estimated that the change of foreign exchange outstanding funds in the future would be very small, no matter how ups and downs.
Foreign exchange was once China’s monetary base on the main tool, but in 2015, after the 8.11 yuan reform foreign exchange has continued to shrink, the central bank through the $to the market to stabilize exchange rate, and with the rising of RMB exchange rate flexibility, declining, the fluctuation of foreign exchange, began in December 2018 less than 10 billion yuan, the monthly changes of foreign exchange are basic exit the normal type shows that the central bank intervention.
Xie Yaxuan of China Merchants Securities also estimated that “the market pays close attention to the actions of the central bank. The Central bank also said in the third quarter’s monetary policy implementation report that the central bank should exit from normal intervention. From the performance of the data, the central bank should match its words with deeds.”
He added that the short-term trend of the US dollar is also uncertain, in addition to the recent regulatory measures to reduce foreign exchange outflow restrictions, these will improve the supply and demand relationship in the foreign exchange market, while the exchange rate flexibility will also affect the exchange rate expectations, the degree of marketization of the RMB will also be further improved.
More than half a year after easing restrictions on cross-border financing, the Central bank of the Communist Party of China (CPC) and the State Administration of Foreign Exchange (SAFE) have once again returned the macro-prudential adjustment parameters of cross-border financing to neutral, aiming to reduce domestic institutions’ financing from overseas and thus ease the pressure of capital inflow.
Funds outstanding for foreign exchange is the local currency that the central bank will release in response to the purchase of foreign exchange assets. The increase of funds outstanding for foreign exchange by the central bank indicates that the central bank has injected base money into the market.
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