Core Viewpoint - The recent increase in China's foreign exchange reserves to $3.34 trillion contrasts sharply with the depreciation of the RMB against the USD, raising questions about the effectiveness of reserve accumulation in stabilizing the currency [2] Group 1: Data Paradox - The growth in reserves is accompanied by concerns over structural imbalances, with the proportion of USD assets falling to 58% from a peak of 73% in 2014, while holdings in EUR, JPY, and gold have increased to 32% [2] - The opportunity cost of holding USD assets is significant, with a yield of 2.3% compared to 4.8% for 10-year US Treasury bonds, resulting in an annualized opportunity cost exceeding $15 billion [2] - The RMB depreciation is driven by three main factors: widening interest rate differentials, narrowing trade surpluses, and diverging policy expectations [2] Group 2: Arbitrage Opportunities - The onshore-offshore price gap for the RMB has widened, creating an arbitrage opportunity with a potential annualized return of 1.9% [2] - The offshore RMB liquidity has tightened, as indicated by the spike in CNH Hibor to 13.4%, the highest since 2013, increasing the cost of arbitrage [2] - The derivatives market shows a 2.1% arbitrage opportunity between NDF and DF rates, with a significant increase in foreign institutional trading volume [2] Group 3: Policy Responses - The central bank has reactivated counter-cyclical factors in the exchange rate management model, adjusting the counter-cyclical coefficient to 0.8 to limit depreciation [2] - Capital controls have been tightened, requiring banks to conduct thorough reviews of large foreign exchange transactions, particularly in technology and real estate sectors [2] - The central bank has signaled stability by emphasizing the adequacy of reserves to manage short-term fluctuations and has increased gold holdings to diversify reserve assets [2] Group 4: Underlying Contradictions - Concerns about the quality of reserves are rising, particularly regarding the liquidity risks associated with the $1.1 trillion in US Treasury bonds held by China [2] - The balance between market-driven and interventionist approaches in exchange rate formation is challenged, with a significant increase in direct interventions by the central bank [2] - The real effective exchange rate has appreciated by 23% since 2015, impacting export competitiveness and increasing import costs for key commodities [2] Group 5: Future Outlook - Short-term arbitrage opportunities are expected to narrow by Q4 2025 as the US Federal Reserve nears the end of its rate hike cycle [2] - Long-term reforms are anticipated, including optimizing reserve structures and enhancing the flexibility of the RMB exchange rate [2] - The need for a new balance in reserve management, exchange rate mechanisms, and industrial upgrades is emphasized to ensure sustainable financial security [2]

Core Viewpoint - The People's Bank of China (PBOC) announced a 1% reduction in the foreign exchange deposit reserve ratio, lowering it from 9% to 8%, effective May 15, 2022, to enhance the foreign exchange fund utilization capacity of financial institutions [1][3]. Group 1: Impact on Foreign Exchange Market - The reduction in the foreign exchange deposit reserve ratio is expected to increase the supply of foreign exchange in the market, stabilize market expectations, and support the stability of the RMB exchange rate [1][3]. - As of the end of March, the foreign currency deposit balance was $1.05 trillion, meaning the 1% reduction could release approximately $10.5 billion in foreign exchange liquidity [1][3]. - Following the announcement, both onshore and offshore RMB exchange rates against the USD rose, with the onshore rate at 6.5498 and the offshore rate at 6.5784 as of April 25 [4]. Group 2: Economic Implications - The reduction is seen as a measure to stabilize the foreign exchange market and provide more foreign exchange funds to meet the needs of the real economy and domestic entities for repaying foreign debts, especially amid significant economic downward pressure [2][4]. - The cautious nature of the 1% reduction is noted, especially compared to previous increases in the reserve ratio in 2021, indicating that further adjustments may be considered by monetary authorities to stabilize the exchange rate [2][4].

Core Viewpoint - The People's Bank of China (PBOC) has decided to lower the foreign exchange deposit reserve ratio by 2 percentage points, from 8% to 6%, effective September 15, 2022, to enhance the foreign exchange fund utilization capacity of financial institutions [1] Group 1: Policy Changes - The reduction in the foreign exchange deposit reserve ratio is aimed at increasing the liquidity of US dollars in the market and improving the foreign exchange fund utilization capacity of financial institutions [1] - This is the second time in the year that the PBOC has lowered the foreign exchange reserve ratio [1] Group 2: Market Impact - The recent depreciation of the Renminbi against the US dollar, which has seen a decline of 2.3% since August 15, signals the importance of the PBOC's decision in stabilizing market expectations for the Renminbi [1] - Analysts believe that the adjustment will help alleviate the depreciation pressure on the Renminbi against the US dollar, especially as the exchange rate approaches the critical level of 7.0 [1][2] Group 3: Economic Context - The overall domestic economy is in a recovery phase, and the international balance of payments is expected to maintain a significant surplus, making it difficult for depreciation expectations of the Renminbi to gather momentum [2] - The PBOC's deputy governor noted that the current operation of the Chinese foreign exchange market is normal, with orderly cross-border capital flows, and the impact of US monetary policy is manageable [2]