Will trade surplus support “three consecutive rises” of RMB exchange rate in 2022?

2022-07-25 0 By

Source: the first finance and economics, the original title: higher-ups 7 talk | Mr Guan: 2022 trade surplus to support “three” of RMB exchange rate?It depends on three things.In 2021, the central parity rate of the RMB (against the US dollar) rose another 2.3% after the 6.9% rise in the previous year, realizing the “double rise” under the rebound of the US dollar index, which mainly reflects the market supply and demand driven by the trade surplus.In that year, the surplus of foreign exchange settlement and sale of banks’ forward (including options) amounted to us $274.2 billion, among which, the surplus of foreign exchange settlement and sale of banks’ goods trade on behalf of customers amounted to US $336.5 billion, contributing 123% of the total surplus.At the start of the New Year (2022), the RMB exchange rate continued to maintain strength, with both the central parity rate and the trading rate hitting the highest level since the end of April 2018 on January 26.Only in the following two trading days, as the DOLLAR index rose above 97, it retreated sharply.By The 28th, the central parity rate of RMB was basically unchanged from the end of last month.In the whole month, the average daily foreign exchange volume of spot inquiry in the domestic interbank market was 30.8 billion US dollars, down 8% from the previous month.In particular, the central parity rate and the exchange rate broke 6.34 and 6.33 for four consecutive trading days from July 21 to 26, but the foreign exchange turnover was below 29 billion dollars.On the contrary, on the 27th, the trading price quickly reversed, the trading volume of the day was 46.8 billion DOLLARS, the highest in the past three months.This shows that after the year-end effect of financial accounting and stronger demand for RMB payment, the foreign exchange supply and demand tend to improve.In 2022, whether customs trade surplus can support further strengthening of RMB exchange rate depends on three points.One is the size of the trade surplus itself.In 2022, it is expected that the global economic recovery will weaken further, while China will face the challenges of “three shortages” (shortage of core, cabinet and labor) and “four liters” (rising raw material prices, soaring freight costs, rising energy prices and RMB appreciation), which may lead to order diversion and may not maintain high export growth.The key to maintaining steady domestic growth is to expand domestic investment and consumer demand, which will narrow the gap between domestic supply and demand, meaning that the role of external demand in driving economic growth will be weakened.Still, China’s trade surplus for the full year is expected to reach $400 billion.At the same time, China continued to enjoy the FIRST-in, first-out dividend and its trade surplus further expanded, not excluding the global pandemic for most of 2022 due to slow vaccination or novel coronavirus variants.Container transport vehicles pass by stacked containers at Qingdao Port in East China’s Shandong province on Dec 7, 2021.Xinhua photo.Second, the trade surplus into a surplus of foreign exchange settlement and sales.In 2021, foreign exchange settlement and sale of goods trade accounted for 72.9% (73.6% in the last four months), up 1.6 percentage points from the previous month, and up 7.9 percentage points from the previous low in 2016. This shows that foreign exchange settlement and sale of trade has a greater impact on customer trading, which is the micro market basis that RMB is easy to rise but difficult to fall in the appreciation environment.But trade surplus is not equal to trade surplus in foreign exchange settlement and sales.From 2016 to 2020, the ratio of trade surplus to foreign exchange surplus was 49.3 percent on average.In the meantime, it was as low as less than 40% in 2016 and 2019, and as high as more than 60% in 2017 and 2018.The conversion rate in 2021 was 49.7%, up 4.0 percentage points month-on-month, but only slightly above the trend of the past five years.The change of the willingness of market subjects to settle and sell foreign exchange caused by market mood fluctuation affects the conversion rate of trade surplus.Looking ahead to 2022, there are many uncertainties and destabilizing factors at home and abroad, including economic recovery, financial risks, interest rate differentials between China and the US, and the trend of the US dollar.At present, China’s annual exports and imports are two to three trillion US dollars each. Every percentage point change in the market’s willingness to sell and purchase foreign exchange will involve a capital scale of 20 to 30 billion us dollars.If a drop in willingness to settle foreign exchange and an increase in motivation to buy foreign exchange occur at the same time, it will easily cause changes in the balance of hundreds of billions of dollars of foreign exchange settlement and sale.At the same time, do not underestimate the market’s ability to divert trade surpluses.In the past two years, foreign exchange deposits of financial institutions increased by us $159.4 billion, including US $154.9 billion of foreign exchange deposits of non-financial enterprises.At the end of 2021, the balance of domestic RMB deposits was 231 trillion yuan, and domestic foreign exchange deposits/domestic RMB deposits were 1.9%, among which non-financial enterprises’ domestic foreign exchange deposits/domestic RMB deposits were 4.8%.Based on the year-end central parity rate of RMB and the balance of RMB deposits, to reach 2.5% and 5.4% at the end of 2017, the total amount of domestic foreign exchange deposits will increase by 195.8 billion USD, among which non-financial enterprises will increase by 64.5 billion USD.To reach the end of 2016 levels of 2.7 per cent and 5.7 per cent, total domestic foreign exchange deposits would need to increase by $287.9 billion, including $100.4 billion for non-financial companies.Third, the extent to which surplus of foreign exchange settlement and sale is offset by deficit of foreign exchange settlement and sale through other channels.Under the baseline scenario, it is expected that as the global epidemic is gradually brought under control and restrictions on cross-border personnel movement are gradually lifted, it is highly likely that China’s foreign exchange demand for services trade will rebound in 2022.At the same time, there is still room to expand the use of foreign exchange for domestic capital accounts.From 2018 to 2021, the proportion of capital account in bank’s foreign exchange settlement and payment on behalf of customers will increase by 21.2 percentage points, but the proportion of bank’s foreign exchange settlement and sale on behalf of customers will increase by 3.4 percentage points.In 2021, foreign exchange purchase under capital account increased by 27% year on year, and foreign exchange purchase for securities investment increased by 59% on the basis of the 60% increase in the previous year.It is expected that increasing the settlement and sale of foreign exchange under capital account in guest trading, especially foreign exchange purchase, will remain an important direction of foreign exchange policy adjustment in 2022.In addition, over 10 trillion yuan of domestic stocks, bonds, deposits, loans and other RMB financial assets are currently held overseas, amounting to about $1.60 trillion at the year-end central rate.If the fed’s monetary tightening triggers a concentrated reduction in foreign holdings, each percentage point of adjustment involves about $16 billion in foreign exchange demand.Taken together, a large trade surplus enhances China’s ability to withstand capital flow shocks, but the trade surplus needs to build up over time and capital outflow pressures can be released in a flash, a mismatch that could still weigh on the renminbi.In 2022, the internal and external environment will become more complex, severe and uncertain, and the factors affecting the trend of RMB exchange rate will still be mixed.Even if the trade surplus grows, it is not necessarily good for the yuan if the market views it as recessionary.The year 2019 is not far away.In 2021, the RMB exchange rate will rise above 6.50 in the beginning of the year, with the largest increase of 1.3% in the first month. The Large-diameter RMB exchange rate index of China Foreign Exchange Trade System will rise 1.7%.At the beginning of 2022, the customs import and export surplus reached nearly 100 billion yuan last month, but the RMB exchange rate has not broken 6.30 so far. The maximum increase of bilateral and multilateral exchange rates in the first month was only 0.8%, which may indicate the weakening of the appreciation momentum.Officials have warned that “the degree of deviation is proportional to the force of correction”.After the “double surge”, it may not be “Wolf at the door” to focus on the risk of exchange rate correction triggered by market or policy factors.