summary

the narrowing of the interest rate gap between china and the united states and the surge in foreign exchange settlements by enterprises are both internal and external to each other, forming a spiral of rising rmb exchange rates. in the medium and long term, cross-border capital flows driven by changes in economic expectations between china and the united states have caused the rmb exchange rate to fluctuate in both directions.

text｜kang kai

editor｜yuan man

with the breakthrough of important nodes one by one, the ripples caused by the rmb exchange rate are gradually expanding.

"this morning, when i entered the trading room, i felt like i was in a war, because the rmb exchange rate finally rose above the key point. we had a premonition of this, and it only takes a moment to truly break through." on september 25, a foreign exchange trader based in shanghai lisa began to firmly place long positions in the rmb.

she told caijing, "it is expected that this appreciation cycle will continue."

on september 25, the offshore rmb regained the 7.0 mark against the u.s. dollar, reaching a maximum of 6.9993, the first time it reached this high since may last year. on that day, the onshore rmb exchange rate closed up 167 points against the us dollar, hitting a new high in more than 16 months with the central parity rate. looking over a longer period of time, the rmb exchange rate has risen by nearly 4% in the past three months.

at the same time, onshore and offshore equity assets surged. on september 25, the shanghai, shenzhen and beijing markets staged a general rise, with more than 4,100 stocks rising. on the same day, hong kong's hang seng index rose 128.54 points, or 0.68%, to close at 19129.1 points. the main board transaction volume for the whole day was hk$254.845 billion. on september 24, eastern time, popular chinese concept stocks generally rose, with the nasdaq china golden dragon index rising by more than 9%, the largest single-day increase since 2022.

the market's excitement continued into the last trading day before the holiday. on september 30, just 35 minutes after the market opened, the transaction volume of the shanghai and shenzhen stock markets exceeded 1 trillion yuan, setting a new record for the fastest transaction in history. wind’s total a turnover exceeded the 2 trillion yuan mark, the first time since june 2015.

as of the close on september 30, the shanghai composite index was at 3336.50 points, setting its highest closing price in the past year. in less than 10 trading days, the shanghai composite index returned from 2,700 points to 3,300 points. on the same day, the shenzhen component index closed at 10,529.76 points, up 10.67%. a-share trading volume reached a record high of 2.5931 billion yuan throughout the day.

in terms of external markets, as of the close on september 30, hong kong's hang seng index reported 21133.68 points, an increase of 2.43%, and the market's full-day turnover was hk$505.838 billion. in addition, foreign capital is rushing to enter the chinese market.goldman sachsdata show that on september 24, chinese stocks recorded the largest single-day net buying since march 2021, the second highest level in the past decade.

behind this is the "stimulant" that supervision has injected into the market.on september 24, the people's bank of china (hereinafter referred to as the "pboc") struck three arrows at the same time: a comprehensive rrr cut and an interest rate cut, an interest rate cut on existing mortgage loans, and an 800 billion yuan investment in the stock market.

on the same day, the state financial supervision and administration (hereinafter referred to as the “safe”) announced that the country plans to increase core tier-one capital for six large commercial banks and plans to expand bank equity investment pilots.

subsequently, stimulus policies were introduced at an accelerated pace. on september 26, a meeting of the political bureau of the cpc central committee was held. in response to the current economic growth challenges, the meeting proposed a comprehensive and systematic package of stimulus policies, requiring necessary fiscal expenditures to be ensured, the real estate market to stabilize, and the deposit reserve ratio to be reduced. , implement strong interest rate cuts, and deploy plans to boost the capital market. on september 27, the largest interest rate cut in the past four years was implemented, and the rrr cut released trillions of long-term liquidity. on september 29, the three first-tier cities of shanghai, shenzhen and guangzhou implemented favorable policies for the property market.

but on the other side of the coin, the rising rmb exchange rate has caught foreign traders off guard, and "tidal waves of foreign exchange settlements" have occurred frequently.data from the state administration of foreign exchange (hereinafter referred to as the "foreign exchange administration") show that in august, banks' foreign-related receipts and payments on behalf of customers reversed five consecutive months of deficits.

according to market participants, whether foreign traders can better control exchange rate risks in the future depends on whether they can expand the use of rmb local currency, which is closely related to the internationalization of rmb. currently, with the support of improved rmb payments and regulatory policies, the market is enthusiastic about rmb financing.

looking forward to the trend of the rmb exchange rate in the market outlook, the market remains optimistic about the rmb against the background of china's regulatory stimulus policies and the weakening of the u.s. dollar.

cicc believes that there is still the possibility of the rmb exchange rate rising further in the short term, and it does not rule out the possibility of the rmb exchange rate further rising below 7.0 before the end of the year.

the reasons behind this are that firstly, further interest rate cuts by the federal reserve will lead to a narrowing of the interest rate gap between china and the united states, and secondly, because the foreign exchange settlement needs of enterprises have not yet been cleared, there is still a large demand for selling us dollars before the end of the year.

ubsthe forecast for the rmb/usd exchange rate at the end of the year will be adjusted to 7.1, from 7.1-7.2 previously.

"in the medium and long term, changes in the rmb exchange rate depend on many factors, including interest rate differentials between china and the united states, as well as cross-border capital flows driven by expected changes in the economies and financial markets of the two countries. therefore, in the medium and long term, the rmb exchange rate it may show a two-way fluctuation trend of rising and falling according to changes in market supply and demand," cicc said.

overcoming hundreds of billions of dollars in foreign exchange settlement

"7.3, 7.2, 7.1, 7.0..." looking at the jumping numbers in the foreign exchange market every day, ding yandong, the general manager of ningbo remax door and window accessories co., ltd., regretted it. after all, if you settle the foreign exchange a few days earlier, you can save millions of dollars in costs.

"even if customer demand is strong, the appreciation of the exchange rate puts me at risk of 'working for nothing'. in the past few months, our company's profits have been swallowed up by millions of dollars. many of my friends who are engaged in foreign trade have begun urgent settlement of foreign exchange. see the good point will be settled, although it may not be accurate, but it will save you a little loss," he told caijing.

there are not a few foreign traders who hold this idea.according to data from the state administration of foreign exchange, in us dollar terms, in august, banks' foreign-related income on behalf of customers was us$598 billion, and external payments were us$582.6 billion, recording a surplus of us$15.3 billion, reversing the previous five consecutive months of deficits.

the rapid rise in the rmb exchange rate caught the market, which was once bullish, off guard.under the principle of "real demand", the number of trading entities in the foreign exchange market is limited and it is easy to form consistent expectations. this makes it easy to cause "panic purchases of foreign exchange" when the rmb depreciates, and "trampled foreign exchange settlements" when it appreciates.

driven by factors such as demand for foreign exchange settlement, the foreign exchange market has already been affected by the trend. after july, the rmb exchange rate accumulated rising momentum. august 30 has been a relatively active day in the market recently. on that day, the onshore rmb exchange rate against the us dollar rose by more than 220 points, hitting a 15-month high.

according to goldman sachs, anz,barclays bankagencies and other agencies estimate that in the past two years, chinese exporters have accumulated approximately us$400 billion to us$600 billion in unsettled foreign exchange earnings.

according to anothermorgan stanleyit is estimated that in july, the foreign exchange settlement ratio of chinese exporters was at a historical low, at 13.5%. this means that for every us$100 of export revenue received, chinese companies only exchanged us$13.50 into renminbi.

some traders also said that if we look at the trading situation in august, it is expected that the unsettled scale of the foreign exchange market in the future will be net digested by about 100 billion us dollars in a single month.

the reason why there is a large amount of unsettled foreign exchange remaining in the market is mainly because the fed's interest rate cut cycle has been repeatedly postponed, the us dollar continues to strengthen, and there were strong expectations for the depreciation of the rmb exchange rate.

not only that, because u.s. debt interest rates are high, the foreign exchange hoarded by chinese companies can also earn higher returns through external financial management and investment.

listed companylake electricthe 2023 annual report shows that the company's interest income that year was 291 million yuan. at the end of the year, the company held approximately 5.888 billion yuan in monetary funds, nearly 90% of which were us dollar deposits. in addition, foreign currency financial management is also a common investment method.

as the rmb appreciates, the risk of not locking foreign exchange gradually emerges.ningbo huaxiangit said that the company had an exchange loss of 39 million yuan in the first half of the year and an exchange gain of 45 million yuan in the same period last year, with a difference of nearly 84 million yuan.zhejiang dinglithe data shows that exchange losses in the first half of the year were 40 million yuan, and exchange gains in the same period last year were 156 million yuan.

this has dampened the profits of foreign traders to a certain extent. "for us, it would be very dangerous if we cannot guarantee that the net profit is above 5%. if the exchange rate fluctuates greatly, the company's profits may be gone." ding yandong said.

many market participants believe that it is still unclear whether a wave of foreign exchange settlement will emerge in the future."only when the interest rate situation changes, or when it is believed that the u.s. dollar is in a downward trend, the foreign exchange hoarded by foreign trade companies may be released in large quantities. there are still many uncertainties in the level and speed of the correction of u.s. dollar and u.s. bond interest rates." dbs bank senior economics teacher zhou hongli told caijing.

as of now, the interest rate spread between china and the united states on 10-year treasury bonds is still around 170 basis points. the interest rates on u.s. dollar deposits held by many banks in hong kong are mostly between 3% and 4.9%.

deutsche bankxu zhuojie, general manager of the enterprise foreign exchange management department in greater china, told caijing that during the period of rmb exchange rate appreciation, foreign exchange settlement is a common behavior for foreign trade companies. however, companies generally do not rapidly change deposit ratios or significantly increase foreign exchange settlements due to changes in foreign exchange or interest rate policies. their decisions are still based on corporate foreign exchange policies and the outlook for the financial market throughout the year.

"in terms of exchange rate risk management, if the exchange rate appreciates further, it is expected that some companies will not be eager to settle foreign exchange immediately. first, some funds may make further related investments overseas to maintain the normal operation of continued overseas investment projects. second, in the rmb in the absence of significant unilateral appreciation, the u.s. dollar’s ​​yields still have a certain appeal, and the diversified selection of u.s. dollar investment products can also further increase returns and extend the maturity of companies,” she said.

xu zhuojie also said that for the future receivables of overseas exports, the proportion of hedging and foreign exchange settlement will increase. as expectations change, in order to avoid the impact of foreign exchange losses on the income statement, the proportion of spot foreign exchange settlement is expected to increase accordingly.

ding yandong said that a sharp rise or fall in the rmb exchange rate will affect foreign trade business. an appreciation of the exchange rate may hurt profits, and a depreciation of the exchange rate may cause customers to demand price cuts. “what we most want to see is exchange rate stability,” he said.

some traders said that 7.1 may be its important foreign exchange settlement point, because at this time the foreign exchange profits and losses are equal, and you will not lose money even if you do not hedge. "when we look at the income statement, we will refer to the central parity rate of the rmb exchange rate at the end of last year, or the standard of the accounting exchange rate on our own statements. the central parity rate of the rmb exchange rate at the beginning of the year was 7.07," he said.

rmb exchange rate breaks through 7

behind the surge in foreign exchange settlement, the rmb exchange rate is soaring. the two are mutually reinforcing each other, forming an ever-rising spiral.

in zhou hongli's view, the future trend of the rmb exchange rate is the key to determining the psychology of foreign traders in settling foreign exchange.according to anothercitic construction investmentit is estimated that if the backlog of foreign exchange settlement demand is released intensively, about 10 billion u.s. dollars of foreign exchange settlement funds will support the appreciation of the rmb exchange rate by 1,000 points.

in early trading on september 25, the onshore rmb exchange rate against the u.s. dollar narrowed its gains after approaching the 7 mark. the offshore rmb exchange rate against the u.s. dollar once rose above 7, both hitting a high of more than 16 months; the central parity rate of the rmb exchange rate also refreshed for more than 16 months. high position.

in the view of some traders, china's financial stimulus policy "gift package" is boosting market sentiment. coupled with the weakness of the external us dollar, the yuan is expected to remain strong in the short term. "both the internal and external environments are more friendly to the trend of the rmb, and the rmb exchange rate may continue to heat up in the future."

cicc believes that there is still the possibility of the rmb exchange rate rising further in the short term, and it does not rule out the possibility of the rmb exchange rate further rising below 7.0 before the end of the year.

the reasons behind this are that firstly, further interest rate cuts by the federal reserve will lead to a narrowing of the interest rate gap between china and the united states, and secondly, because the foreign exchange settlement needs of enterprises have not yet been cleared, there is still a large demand for selling us dollars before the end of the year.

ubs adjusted its forecast for the rmb exchange rate against the u.s. dollar at the end of the year to 7.1, from 7.1-7.2 previously.

market participants generally believe that regarding the direction of the rmb exchange rate, from the perspective of domestic factors, it depends on whether the stimulus policy will be gradually increased and the subsequent recovery of china's economic fundamentals; from the perspective of international factors, it is necessary to pay attention to the progress of the federal reserve's interest rate cuts and the direction of the us election.

on september 24, the central bank of china fired three arrows. first of all, it is to cut the reserve requirement ratio and interest rates across the board. that is, the deposit reserve ratio will be lowered by 0.5 percentage points, the main policy interest rate of 7-day reverse repurchase operations will be lowered by 0.2 percentage points, and the lpr (loan market quotation rate) and deposit interest rates will be guided downward simultaneously.

secondly, interest rates on existing mortgage loans have been reduced. guide commercial banks to lower existing mortgage interest rates to near the new loan interest rates, and unify the minimum down payment ratio for first and second home loans at the national level to 15%.

third, two structural monetary policy tools, "swap facility for securities, funds and insurance companies" and "special re-lending for stock repurchases and increases" were created, with an initial quota of 800 billion yuan to provide liquidity support for the stock market...

pan gongsheng, governor of the people's bank of china, said that the central bank's monetary policy adjustment mainly has four considerations: first, to support the stable growth of china's economy; second, to promote a moderate recovery in prices; third, to support both the growth of the real economy and the health of the banking industry itself; and fourth, maintain the basic stability of the rmb exchange rate at a reasonable and balanced level.

in addition, as banks’ net interest margins continue to narrow, on september 24, li yunze, director of the state administration of financial supervision, stated that the national plan to increase core tier-1 capital for six large commercial banks will be carried out in accordance with “overall planning, phased in, and batched. the idea of ​​"one line, one policy" is implemented in an orderly manner.

li yunze further stated that financial asset investment companies affiliated to large commercial banks already have the conditions to expand equity investment pilot projects."we will study with relevant departments to expand the scope of the pilot from shanghai to 18 large and medium-sized cities with active scientific and technological innovations, including beijing, appropriately relax restrictions on the amount and proportion of equity investment, and increase the proportion of on-balance sheet investment from the original 4% to 10%, the proportion of investment in a single private equity fund will be increased from the original 20% to 30%, and relevant institutions will be guided to implement the requirements of due diligence and exemption, and establish and improve long-term and differentiated performance appraisals.”

on september 26, a meeting of the political bureau of the cpc central committee was held. in response to the current economic growth challenges, the meeting proposed a comprehensive and systematic package of stimulus policies, requiring necessary fiscal expenditures to be ensured, the real estate market to stabilize, and the deposit reserve ratio to be reduced. , implement strong interest rate cuts, and deploy plans to boost the capital market.

on september 27, the largest interest rate cut in the past four years was implemented, and the rrr cut released trillions of long-term liquidity.

on september 29, china implemented favorable policies for the property market. guangzhou launched the "first shot" of fully liberalizing home purchase restrictions in first-tier cities. shanghai and shenzhen both stated that they would allow more home buyers to buy houses in the suburbs and lower the minimum down payment ratio for first and second homes. .

the launch of this round of financial, capital market, real estate and other combinations is aimed at effectively boosting the economy.data from the national bureau of statistics show that in august, china’s total retail sales of consumer goods only increased by 2.1% year-on-year, which was lower than the 2.7% year-on-year growth rate in july. in august, the growth of industrial added value fell by 0.5 percentage points year-on-year to 4.5%. from january to august, fixed asset investment increased by 3.4% year-on-year, and the growth rate was also lower than the 3.6% from january to july.

judging from financial data, new loans in august were 900 billion yuan, a decrease of about 460 billion yuan year-on-year.

cicc believes that the impact of the above-mentioned policy "combination" is that, first of all, this interest rate cut will reduce the interest payment burden of about 690 billion yuan on the real economy. secondly, the pressure to repay principal has been on the rise in recent years, and the loan renewal policy can help substantially reduce cash flow risks. thirdly, the magnitude of the rrr cut is not only to meet the needs of the current credit expansion and existing fiscal strength, but may be partially used to replace the mlf (medium-term lending facility), and may also be used to prepare for potential fiscal strength.

the agency also said that the structural monetary policy tools created by the people's bank of china for the first time were used to support the stock market. monetary policy adjustments, coupled with financial regulatory and capital market reform measures, have had a positive impact on stock market expectations. in addition, real estate-related policies continue to alleviate liquidity constraints from both the demand and supply sides.

goldman sachs said in a report released on september 24 that the policy interest rate and deposit reserve ratio were rarely lowered at the same time, marking the arrival of a new round of policy easing in china.it is expected that in the fourth quarter, the people's bank of china will lower the deposit reserve ratio again by 25 basis points. in 2025, the deposit reserve ratio will be lowered twice by 25 basis points each, and the policy interest rate will be lowered twice by 10 basis points each.

the bank believes that a 50 basis point reduction in the deposit reserve rate can inject approximately 1 trillion yuan into the banking system.

wang tao, head of asia economic research and chief china economist at ubs, said that the rate cut by the people's bank of china was slightly larger than expected, and the government's move to increase core tier one capital supported the banking system. the above measures combined with more effective fiscal policy support have helping support a slight rebound in growth momentum during the year.

looking over a longer period of time, from july to the end of september, the onshore rmb exchange rate appreciated by 4% cumulatively, and has rebounded for three consecutive months. behind this, the relaxation of external constraints is the main motivation.

on september 18, local time, the federal reserve decided to lower interest rates by 50 basis points, lowering the benchmark federal funds rate to a range of 4.75% to 5%, a decrease higher than the 25 basis points expected by the market. this means that, after four years, the federal reserve has started its interest rate cutting cycle with a bolder pace.

xie dongming, head of research for greater china at ocbc bank, told caijing that the reference point for the u.s. economy has shifted from the "anti-inflation" stage of the volcker period to the "soft landing" stage of the greenspan period. compared with greenspan's gradual the current pace of interest rate cuts of 25 basis points has made the current federal reserve chairman powell more flexible and decisive.

donald kohn, former vice chairman of the federal reserve, worked at the federal reserve for 40 years and had in-depth contacts with former federal reserve chairs such as volcker, greenspan, and powell. in an interview with caijing in early september, he believed that even if the market repeatedly believes that a recession is imminent, the u.s. economy is expected to achieve a "soft landing" again. this is because as the labor market cools, the federal reserve has timely started to cut interest rates.

this ignited market sentiment, because in the market's view, the fed's move was a "precautionary interest rate cut" intended to "prepare for a rainy day."

on september 19, the day after the federal reserve cut interest rates, asia-pacific stock markets surged significantly, with the nikkei 225 index rising nearly 3%, and both the shanghai composite index and the hang seng index climbing nearly 1%.

external pressures on emerging markets have also eased.on september 19, the hong kong monetary authority announced that it would lower the basic interest rate by 50 basis points to 5.25%, which was its first interest rate cut in four years. hsbc, one of hong kong's "note-issuing banks", announced that starting from september 20, it will reduce the interest rate on u.s. dollar savings deposit accounts by 25 basis points.

according to traders, regulatory control can also be seen in the process of rmb appreciation. for 14 consecutive trading days since august 20, the deviation between the central parity rate of rmb against the u.s. dollar and the average value of the bloomberg survey has been less than 100 points, and the frequency of strong and weak biases is similar. in addition, during the period of rapid appreciation of the renminbi, major chinese banks purchased large amounts of u.s. dollars.

exchange rate hedging measures upgraded

what is certain is that the two-way fluctuation of the rmb has become the norm.

correspondingly, in addition to foreign exchange settlement, exchange rate hedging has also become a common risk hedging behavior for market entities. "hedging is a company's pre-management of some future accounts receivable, such as locking in the depreciation of the u.s. dollar against the rmb through forward products. we foresee that the proportion and demand for hedging will increase." xu yaojie said.

zhou hongli also said that in order to avoid exchange losses, foreign traders can use derivative instruments such as forward contracts or options for risk hedging to lock in exchange rate prices.

data from the state administration of foreign exchange show that in july, china’s foreign exchange market (excluding the foreign currency pair market) had a total transaction volume of us$3.92 trillion, a record high and a month-on-month increase of 25%. from a structural point of view, the foreign exchange swap market and spot market, as the main foreign exchange markets, contributed the most to the growth in transaction volume during the month, increasing by us$305.3 billion and us$449.3 billion respectively from the previous month.

in the same month, the trading volume of the forward market increased by nearly 33% year-on-year, far exceeding the year-on-year growth rate of the total transaction value of the foreign exchange market. however, the trading volume in the forward market is much smaller than that in the swap market.

lisa helped caijing calculate how much foreign exchange forward products can save on foreign exchange purchase costs. when the exchange rate is around 7.04, if a forward contract is signed with a bank, based on the previous swap point estimate of -1800, assuming other factors remain unchanged, the exchange rate for the company to purchase u.s. dollars one year later can be around $6.80. if the company initially received a total payment of us$1 million, the initial rmb exchanged would be approximately rmb 7.04 million, and the subsequent foreign exchange purchase cost would be approximately rmb 6.8 million.

"the rmb forward exchange rate is the spot exchange rate plus or minus the premium and discount. as the federal reserve cuts interest rates, it will not be so cost-effective to buy forward products in the future. the use of foreign exchange forward products involves the subjective judgment of banks and foreign traders on the foreign exchange market. " lisa said.

"for foreign exchange swap products, companies mainly want to allocate idle u.s. dollar funds." lisa further said, "the application scenario of the company is to first receive payment in u.s. dollars and need to exchange it for rmb, but it still needs to purchase again many months later. dollar."

she also explained that at present, the market’s strategy for using swap products is mainly “near-end foreign exchange settlement and far-end foreign exchange purchase.” now it seems that the far-end rmb exchange rate is low because the u.s. dollar interest rate is high and the rmb interest rate is low. in swap products, banks must compensate customers for this part of the spread.

this also reflects another function of foreign exchange swap contracts - financing. it can be understood colloquially as a "loan". the "near-buy-far-sell" swap contract between the u.s. dollar and the renminbi "borrows" an amount of u.s. dollars at a price denominated in rmb, and then "returns" the same amount of u.s. dollars at a price agreed in advance upon maturity.

in fact, since september 2023, foreign investors have been long china's domestic bonds for more than ten consecutive months, taking advantage of this function of foreign exchange swap products.

“from the perspective of interest rate spreads, compared with the u.s. bond market, the returns from investing in the chinese bond market may be relatively low, but the returns for investors long onshore short-term bonds through foreign exchange hedging are still considerable, which has boosted the return of foreign capital to the chinese bond market. "the current inversion of interest rates between china and the united states is the fundamental reason for the sharp discount on the usd/rmb swap point," lisa said.

in xu zhuojie's view, the concepts and operations of foreign exchange hedging of many chinese-funded enterprises are now very mature, and many companies are using rmb financing plus foreign exchange swap products. "how to optimize the financing structure in the future, including financing currency selection, financing cost considerations, and the combination of various currencies when going overseas, are also aspects that companies are generally concerned about," she said.

this is related to the foreign exchange market entities gradually establishing the concept of "exchange rate neutrality".li hongyan, deputy director of the state administration of foreign exchange, recently disclosed that there are more than 40 tradable currencies in china’s foreign exchange market, and the trading varieties also cover mainstream international foreign exchange products. in the first seven months, the total transaction volume of china's foreign exchange market was close to us$23 trillion, a year-on-year increase of 8.7%. during the same period, more than 20,000 merchants handled exchange rate hedging for the first time, helping more companies use foreign exchange derivatives to better manage exchange rates. risk.

however, compared with large enterprises with hedging financial systems, small and medium-sized enterprises have very low profit margins and have no pricing power in the international market. the cost of "hedging" is also unbearable for them.

"currently, when banks handle forward foreign exchange settlement and sales business for corporate customers, they will require the customer to have a corresponding credit line or pay a certain proportion of the initial margin for the transaction. the margin for large customers is generally 3%-5% of the nominal principal. the margin ratio for small and medium-sized customers is usually 5%-10%, and the margin is generally calculated based on the bank's benchmark interest rate, which is far lower than the current actual capital income," said a foreign trader.

"i used to sign a forward foreign exchange purchase agreement with a bank, and i needed to deposit several million yuan in deposits in the bank, which is calculated on the basis of time deposits. when the company is short of funds, this part of the money cannot be used, and additional loans are required. this it takes up a lot of money,” he further said.

lisa said that currently, companies must pay foreign exchange reserves when purchasing foreign exchange, which increases the cost of forward foreign exchange purchases. "it would be better for them to use fx options for hedging."

the current market situation is similar to that of 2015 and 2016.but xu yaojie discovered an obvious change. more and more customers are using foreign exchange forwards, options and other methods to lock in exchange rate costs."this shows that the foreign exchange risk concepts and operations of chinese-funded enterprises have been very mature, and the market is gradually establishing the concept of 'exchange rate neutrality'."

broaden the scenario of rmb internationalization

according to market participants, the key to exchange rate risk control is to use local currency as much as possible. "even if chinese-funded enterprises go global, the accounting currency is still rmb. the most fundamental way for enterprises to increase the use and usage scenarios of cross-border rmb and reduce foreign exchange exchange." uob china mainland and hong kong transaction bank yuan quan, business leader and president of shanghai branch, told caijing.

the usage scenarios of cross-border rmb mainly include payment, financing, investment, etc. against the background of low rmb interest rates, the “overseas expansion” of rmb credit has accelerated recently.as of august, the balance of rmb external loans was 1.85 trillion yuan, a year-on-year growth of 48%. from april to august, new overseas rmb loans totaled 429.3 billion yuan, accounting for 8.6% of new loans in the same period, which was much higher than the proportion of about 1% before the epidemic.

in zhou hongli's view, against the backdrop of the widening interest rate gap between china and the united states, rmb financing is still the most direct and attractive option.

if exchange rates and interest rates are only cyclical factors in rmb financing, then in the long run, the increase in rmb payments is an important reason behind it.

since 2019, the share of payments in rmb among china’s foreign-related receipts and payments has continued to rise. data from the people's bank of china show that in the first quarter of 2024, nearly 30% of all cross-border settlements of china's goods trade (including imports and exports) were settled in rmb.

according to data from the society for worldwide interbank financial telecommunication (swift), in august, the rmb remained the fourth most active payment currency in the world, accounting for 4.69% of total global payments. however, the amount of rmb payments decreased compared with july.

"trade at both ends of the enterprise may be arranged based on two currencies, and front-end trade is often in foreign currency. if the enterprise's front-end trade changes the contract settlement currency from foreign currency to rmb, it can reduce exchange rate risks and financing costs. this requires coordination with counterparties and adjust the profit distribution between the two parties," yuan quan said.

in addition, institutional escort is also a pair of hands that cannot be ignored. in 2022, the people's bank of china and the state administration of foreign exchange jointly implemented relevant regulations to allow domestic banks to directly carry out rmb loan business to overseas enterprises.

from a regional perspective, the “belt and road initiative” and emerging market countries are becoming a new direction for china’s exports, which provides new usage scenarios for cross-border rmb payments and financing.

in the asean direction, uob has helped companies achieve direct exchange and hedging between rmb and southeast asian currencies. "now companies can directly exchange rmb for local currencies in southeast asia without having to convert them into u.s. dollars first. this reduces secondary exchange operations and reduces corporate transaction costs and exchange rate fluctuation risks," yuan quan said.

in the middle east, in october 2023, deutsche bank china provided the industry's first rmb cross-border financing for china power international's refinancing project in brazil's sao simão, which used domestic rmb financing with rmb and real the cross-currency swap transaction structure meets the dual needs of enterprises for rmb loans and foreign exchange interest rate risk management.

in fact, the renminbi has become the main currency used for cross-border trade settlement between china and other countries, especially in the asean trade corridor. this enables the use of rmb in payment settlement, pricing, investment and financing to be integrated with supply chain finance, and jointly contributes to the internationalization of rmb.

“rmb is gradually becoming an international settlement currency and is increasingly used in supply chain finance, with usage scenarios such as oil trade. for companies in the middle east and southeast asia, they may need to realize the flow of supply chain finance denominated in rmb. and need good offshore rmb services," dbs group ceo gao bode told caijing.

in 2014, dbs china joined the china rmb cross-border payment system (cips). as of march 2024, the bank's cips business transaction volume has increased by 67% year-on-year. as an important clearing bank in the singapore market, the bank continues to consolidate cips as an important financial infrastructure for rmb internationalization. singapore is one of the important offshore rmb centers in the world.

in hong kong, another important center for offshore rmb, the issuance of rmb offshore bonds continues to heat up.recently, the guangdong provincial government and the shenzhen municipal government have successfully issued rmb local government bonds in hong kong. hsbc is acting as joint global coordinator and bookrunner on the offering.

jin nanyao, co-head of debt capital markets for asia pacific at hsbc investment bank, said that the above move will help establish an important benchmark for the issuance of longer-term offshore rmb bonds in the future. at the same time, the enthusiastic subscription response from the southbound bond connect and offshore investors also reflects investors’ confidence in the shenzhen government’s credit rating and its commitment to promoting esg development.

on september 24, yue weiman, president of the hong kong monetary authority, said that hong kong is a global offshore rmb business hub and has the world's largest offshore rmb capital pool, providing sufficient liquidity for the dim sum bond market.in the first half of the year, hong kong's dim sum bond issuance reached 465.7 billion yuan, a year-on-year increase of 28%, continuing the rapid growth of the past few years.dim sum bonds refer to rmb-denominated bonds issued in hong kong. mainstream dim sum bond investment channels include “southbound trading”, qdii, rqdii, etc.

however, in yuan quan's view, the use scenarios of overseas rmb still need to be further broadened in the future, which requires increasing the variety of rmb-denominated products.

"for example, in the future, if a company wants to discount rmb letters of credit, if it can successfully manage financing costs, foreign trade companies will be able to boldly use rmb for international trade financing," he said.

in recent years, rmb-denominated products have been continuously expanded.2023,hong kong exchangethe "hong kong dollar-rmb dual counter model" was officially launched. chen yiting, chief executive of hong kong exchanges and clearing limited, said that the institution is currently preparing a 10-year government bond futures contract product.

whether chinese overseas companies and foreign-funded companies will use rmb in the fields of payment settlement, pricing, investment and financing in the future, the rmb exchange rate is also a factor that cannot be ignored.

from the perspective of chinese factors, we need to pay attention to how china's domestic fundamentals stabilize after the central bank of china launched the "combination punch".

wang tao suggested that after the introduction of this round of policies, it is still necessary to further increase policies in the next few months. in order to achieve significant progress in real estate destocking, the chinese government and central bank need to significantly increase financial support and reduce capital costs. in addition, the “whitelist” mechanism needs to be further expanded to support guaranteed delivery of buildings.not only that, it is also necessary to speed up the pace of government bond issuance and fund disbursement, and support local governments by relaxing local implicit debt control to a certain extent. in the coming months, the government is expected to introduce more effective financial support measures.

from the perspective of external factors, we need to pay attention to the pace of interest rate cuts by the federal reserve. quarterly forecasts released by the agency showed that just over half of officials expected to cut interest rates by at least 25 basis points at their november and december meetings.

"to prevent the labor market from continuing to weaken, the fed may cut interest rates by about 150 basis points in the next five quarters," cohen said.

however, zhang jiantai, asia's chief foreign exchange strategist at mizuho bank, reminded caijing that although the fed's interest rate cut is beneficial to the rmb exchange rate, the interest rate gap between china and the united states has not been significantly reversed. the combination of the u.s. presidential election may bring unfavorable factors, and it is expected that the rmb will appreciate in the short term. there will also be obstacles.

("caijing" reporters tang jun and chen hongjie also contributed to this article; at the request of the interviewee, lisa is a pseudonym; the author is a "caijing" reporter; this article was published in the "caijing" magazine published on september 30, 2024)