With the appreciation of the US dollar, domestic capital has tightened, capital outflows have intensified, and the pressure for RMB depreciation has increased. However, the People's Bank of China still maintained the stability of the central parity rate of the exchange rate, sending a signal of stabilizing the exchange rate.

Considering the current tone of loose monetary policy, we believe that the People's Bank of China will still use the open market as the main battlefield to deal with the pressure of capital outflows, and will be cautious about lowering the deposit reserve ratio.

Since December 2014, the RMB has shown obvious depreciation pressure against the US dollar, which continues to this day. At present, although the official exchange rate of RMB against the US dollar - the central parity rate - remains stable, the daily closing price in the spot exchange rate market has depreciated by nearly 2% compared to the central parity rate, reaching the intraday limit allowed by the government. The upper limit of the fluctuation range. At the same time, the yuan also weakened in the offshore forward market (NDF market). Based on forward exchange rates, the current market expectation is that the RMB will depreciate by nearly 4% relative to the US dollar in the next 12 months.

The depreciation pressure on the RMB mainly comes from the recent strong appreciation of the US dollar. In terms of economic growth, the United States currently stands out among developed economies. The Fed's monetary policy is also significantly tighter than that of the European Central Bank and the Bank of Japan - while other major central banks are still conducting quantitative easing (QE) or cutting interest rates, the Fed is preparing to raise interest rates this year.

This obvious difference between the economic aspect and the monetary policy aspect has caused the U.S. dollar to strengthen significantly. Because the RMB is pegged to the U.S. dollar—the central parity rate of the RMB against the U.S. dollar has barely changed—the U.S. dollar has also led to a sharp appreciation relative to other currencies. Since it has risen much, there is naturally pressure to depreciate. Therefore, while the U.S. dollar strengthens, the market exchange rate of the RMB against the U.S. dollar weakens significantly.

The depreciation pressure on the RMB is accompanied by capital outflows. Using data such as foreign exchange balances and trade surplus, it can be estimated that in December 2014, my country's single-month capital outflow reached a record high of 600 billion yuan. When there was a money shortage in June 2013, my country's hot money outflows in a month were only 300 billion yuan. Considering that there is still strong depreciation pressure, the scale of capital outflows in the near future will not be small.

Capital outflows have tightened the domestic financial market. As the pressure of RMB depreciation increases, the price of funds in the domestic financial market has increased significantly, indicating that capital outflows have affected domestic funds. This is in stark contrast to the RMB devaluation in February 2014.

In February last year, the People's Bank of China actively lowered the RMB exchange rate by selling a large amount of RMB, which dispelled the market's expectations of RMB appreciation at that time and created conditions for the smooth amplification of intraday fluctuations in the exchange rate in March last year. . At that time, the RMB sold by the People's Bank of China (that is, foreign exchange holdings) also supplemented the funds in the financial market, causing domestic interest rates to fall while the RMB depreciated. The depreciation since December last year has been accompanied by capital outflows, causing domestic interest rates to rise. Judging from this combination of exchange rates and interest rates, the current devaluation is more like the one in June 2013 during the money shortage, but completely different from the devaluation in February 2014.

In the face of capital outflows, the People's Bank of China will stabilize the exchange rate externally and hedge internal liquidity. Although the pressure on RMB depreciation has increased, the People's Bank of China has still maintained the stability of the central parity rate of the exchange rate, sending a signal of stabilizing the exchange rate. This is very necessary.

If not, the depreciation pressure in the market is likely to further increase, triggering more capital outflows and making policy responses more difficult. Since the People's Bank of China has full control over the RMB exchange rate - it has the power to set the central parity rate and is also the largest trader in the spot exchange rate market - the RMB exchange rate will remain stable in the future.

At the same time as capital outflows, in order to maintain the stability of domestic funds, the People's Bank of China has invested funds in the financial market through open market instruments such as reverse repurchases, MLF, and re-lending for hedging. Considering the current tone of loose monetary policy, we believe that the People's Bank of China will still use the open market as the main battlefield to deal with the pressure of capital outflows, and will be cautious about lowering the deposit reserve ratio.