The exchange rate continues to rise! RMB recovery 7.2 gateway bonds | RMB | gateway

The RMB exchange rate has continued to rise. On July 5th, the central parity rate of the Chinese yuan against the US dollar was 7.1968, an increase of 78 basis points. The onshore and offshore RMB have both risen, with prices reaching 7.2357 and 7.2448 respectively as of the press release by the First Financial News.

"The rebound trend of the Chinese yuan is quite obvious, and the previous short selling direction can be closed," an overseas quantitative fund foreign exchange trader told a reporter from First Financial. According to the reporter's understanding, more and more fund bears have been taking profits recently.

Although the fluctuation of the RMB exchange rate increased in the early stage, several industry insiders interviewed by reporters believe that the depreciation of the RMB exchange rate is limited and is expected to gradually stabilize or even return to the appreciation channel.

RMB rebound channel may open

On the evening of June 30th, the People's Bank of China announced that the Monetary Policy Committee of the People's Bank of China proposed to resolutely prevent the risk of large fluctuations in the exchange rate and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level in the second quarter of 2023. This voice is considered by the market as a heavyweight statement by the central bank to guide expectations for exchange rates.

At the same time, since June, several major banks have lowered their US dollar deposit rates to reduce spread arbitrage activities.

Affected by multiple factors mentioned above, the exchange rate of the Chinese yuan against the US dollar approached the 7.3 mark last week, but began to rebound on Monday of this week.

Li Pei, a strategic analyst at Donghai Securities, said that based on historical data, the observation of the depreciation range of the Chinese yuan exchange rate has continued in the past three rounds after breaking through the "7" midpoint, with an average duration of less than 2 months. This round of exchange rate breaking through the "7" mark began in mid May 2023 and has been ongoing for nearly two months, reaching the point of stabilization.

At the same time, the research team of Donghai Securities pointed out that there is still sufficient space for central bank administrative policy tools. If exchange rates are still constrained, it is not ruled out that policies such as raising the foreign exchange risk reserve ratio, foreign exchange deposit reserve ratio, offshore market central bank bills, and initiating countercyclical factors may be initiated.

Regarding the future trend of the RMB exchange rate, Yan Xiang, a macro research analyst at Huafu Securities, stated that in the short term, the direction of domestic economic recovery after the epidemic is clear. Currently, overseas central banks represented by the Federal Reserve are at the end of the interest rate hike cycle, and the interest rate difference between China and the United States is also at the historical bottom. The region is expected to rebound, which is expected to provide important support for the future trend of the RMB exchange rate. Therefore, we believe that the process of RMB depreciation in the short term has basically come to an end.

The Chief Economist of CITIC Securities clearly believes that if the market's expectations for the future of the Chinese economy improve, it may lead to the repair of direct investment accounts and securities investment accounts; Combined with the gradual pressure on the US economy and the slowing pace of monetary tightening by the Federal Reserve, which has weakened the US dollar index, as well as the abundant policy tool reserves of the central bank to cope with significant foreign exchange fluctuations, the RMB exchange rate is expected to gradually stabilize or even return to the appreciation channel.

Foreign investment continues to increase holdings of RMB bonds

In fact, looking back at the past two months, although the RMB exchange rate has hit bottom several times in significant fluctuations, foreign investment has been buying more and more as it falls.

Data shows that in May 2023, 80 of the institutions that entered China's inter-bank bond market through Bond Connect are among the top 100 asset management institutions in the world. In terms of trading data, the average daily trading volume of Bond Connect reached 46.3 billion yuan, an increase of more than 30 times compared with the just launched data.

Behind the increase in holdings of RMB bonds by top foreign institutions is the continued willingness of overseas institutions to be optimistic about the RMB. Official data shows that overseas institutions increased their holdings of Chinese interbank bonds in May. A report released by the Shanghai headquarters of the People's Bank of China recently showed that as of the end of May, overseas institutions held RMB 3.19 trillion in Chinese interbank market bonds. This number shows an increase of 20 billion yuan compared to the end of April.

"The RMB exchange rate fluctuated greatly in May and June, and in such a market environment, overseas institutions are still increasing their holdings of RMB bonds, indicating their continued optimism towards RMB assets," a macro strategy researcher for public funds told reporters.

A macro researcher at Yongying Fund told a reporter from First Financial that the reason why foreign investors are increasing their holdings of RMB bonds is that overseas capital has a strong demand for hedging RMB bonds in the context of global economic weakness; The second is the "Bond Connect" actively promoted by China, which avoids the risk of upside down of interest margin between China and the United States by holding domestic RMB bonds for overseas capital.

To actively promote the further entry of foreign investment into the Chinese market, the government is also actively promoting the introduction of new policies. At the Bond Connect Annual Forum held a few days ago, Gao Fei, Deputy Director of the Financial Market Department of the People's Bank of China, disclosed that on the sixth anniversary of the opening of Bond Connect, the People's Bank of China, together with the mainland and Hong Kong parties, has promoted the implementation of a package of measures to facilitate investment. First, expand foreign institutions in China to act as market makers in the North Link. Second, provide a basket of bond portfolio trading functions to better meet the needs of index investors. Third, optimize the reporting process of settlement failure of the North Link.