Squeeze Arbitrage Funds Or Exploratory Depreciation

According to the China foreign exchange trading center, the RMB exchange rate in the interbank foreign exchange market in March 10th was 6.1312 yuan, down 111 basis points from the previous trading day, setting the lowest price since December 3, 2013. In March 12th, the central parity rate of RMB against the US dollar was 6.1343. It is widely believed that exports dropped by nearly 20% in February, and the trade deficit was as high as 22 billion 980 million US dollars, which became an incentive for the RMB to depreciate sharply. Zhou Xiaochuan declared that the central bank is more concerned about the medium term trend for exchange rate movements.

"This implies that the renminbi will continue to appreciate after the completion of its short-term devaluation." An insider told the China Times reporter that this is also the case of the central bank. RMB The basic judgement of future trend.

　　 Central bank game

"Before the current devaluation, it is almost no risk to bet on the unilateral appreciation of the renminbi." Zhu Kun, a veteran in the real foreign exchange market, has long been the Hongkong's offshore renminbi (CNH) exchange rate, which is 60-80 basis points higher than the CNY in the mainland, resulting in a large number of speculative arbitrage transactions. In January, foreign direct investment (FDI) was US $10 billion 763 million, an increase of 16.11% over the same period last year. In January, the net settlement of bank loans increased to 76 billion 300 million US dollars, a 1 year high. This allowed China's foreign exchange reserves to increase by US $432 billion 700 million last year, totaling more than US $3 trillion and 800 billion.

In the expectation of unilateral appreciation of RMB, the risk of cross-border capital arbitrage has become increasingly fierce. The central bank obviously does not want to see this situation. On the 5 trading day of from February 18th to 24th, the central parity of the RMB against the US dollar continued to depreciate. By March 11th, the central parity of the RMB against the US dollar reached 6.1327 yuan, compared with the highest 6.09 yuan, the middle price fell 0.7%, which successfully squeezed some of the arbitrage out of the market.

One common sense is that common exchange rate derivatives include RMB deliverable forwards (DF), non deliverable forwards (NDF) and last year's popular "target redemption forward contracts".

"This contract is usually designed for 12 months or 24 months, setting a" strike price "which is lower than the spot price and a" lower protection price "far from the spot price, and the execution price will be once a month and an offshore fixed price. A foreign exchange trader at the Bank of China said that in a simple sense, this is a leveraged investment, which can be profitable every month when the renminbi rises. However, once the exchange rate falls below a specific level, the losses will expand rapidly.

"Last year, the price of such a contract was generally set at 6.3-6.4 (US dollar to RMB), but this year, investors have strong expectations of RMB appreciation, and many contracts are located at prices close to the current market level." According to another hedge fund trader, this means that many of the above contract buyers have stopped losing their business, or choose to extend the contract price.

But the problem is that if the renminbi continues to depreciate, it will lead to more contracts trigger automatic stop points to increase sales, investors will be forced to liquidate, and shorting the renminbi to hedge, then the whole market will go short.

"This is not what the central bank would like to see. In order to prevent large-scale liquidation of the market, the current depreciation can only be tentative and the time will not last for a long time." These people admitted that this may also be a stress test before expanding the fluctuation range of the RMB spot exchange rate.

What regulators want to see is the two-way fluctuation of the RMB exchange rate. A person close to regulators told reporters. Earlier, a number of managers including Zhou Xiaochuan and the Secretary for foreign trade, Yi Gang, repeatedly stressed the importance of "the recent fluctuation of exchange rate is normal."

In the game between regulators and arbitrage, the central bank is also in a dilemma: if the RMB continues to weaken and trigger the arbitrage transaction, the interest rate will rebound. But it is inevitable that large scale capital outflow will lead to the liquidity shock of currency side. More importantly, the decline in Renminbi asset prices. After the current account surplus is declining, the devaluation of the renminbi is expected to bring strong deflation to China.

This is what regulators do not want to see. Liu Yuhui, a professor at the Chinese Academy of Social Sciences, told reporters that once there is a sign of capital outflow, it is almost certain that the central bank will choose to stabilize the RMB exchange rate once again.

　　 Foreign exchange reform Mysterious machine

Whether the policy will or market factors, the two-way fluctuation of the RMB exchange rate signal has been released.

In March 5th, Premier Li Keqiang emphasized the important reforms in the financial field in this year's "government work report", including "maintaining the basic stability of the RMB exchange rate at a reasonable and balanced level, expanding the two-way floating range of exchange rates, and promoting the convertibility of RMB capital items."

This also makes the market expect the daily fluctuation of the spot rate of RMB to expand this year into a probability event. In fact, in from January 9 to 10, 2014, when the central bank's work conference revealed the working principle of the central bank in 2014, it first proposed "strive for a basic balance of payments", which has revealed the mystery of the reform.

Why does the basic balance of international payments mean that the floating range of RMB exchange rate is expanding?

"The balance of payments" itself must be balanced. If there is borrowing, there will be loans, and lending will be the same. Xie Yaxuan, a senior analyst at China Merchants Securities Research and development center, emphasizes that the balance of payments is always relatively small, while the current account balance of the balance of payments is basically the same as the difference between capital account and financial item.

At the same time, he admitted that in the past more than 10 years, most of China's annual balance of payments was "double surplus". As a result, the central bank's behavior to maintain the stability of the RMB exchange rate needed to intervene in the RMB exchange rate in the foreign exchange market, thereby accumulating huge amounts of foreign exchange reserves.

In 2014, if the basic balance of international payments was to be realized, it would mean a smaller change in foreign exchange reserves, indicating that the central bank no longer needed to intervene in the foreign exchange market in succession. This confirms Zhou Xiaochuan's previous statement that the central bank has basically withdrawn from normal foreign exchange market intervention and established a managed floating exchange rate system based on market supply and demand.

　　 To achieve this goal, Central Bank What homework do you need to do?

On the one hand, it is necessary to further promote the process of RMB capital account convertibility, so that domestic economic entities can make more free configuration choices between domestic and overseas assets. Under such conditions, foreign exchange supply and demand and exchange rate fluctuations can truly reflect the real situation of the market.

"On the other hand, we need to moderately expand the floating range of the RMB exchange rate, so that the market and price can play a greater role in regulating supply and demand so that the exchange rate fluctuation itself will adjust the difference between regular and capital account." Xie Yaxuan said.

Xie Yaxuan believes that only in this way, after the expansion of exchange rate volatility, some individuals, enterprises and financial institutions will find that they can make full use of the accurate prediction of exchange rate to invest and speculate, thereby increasing their holdings of foreign exchange assets and even creating more financial products.