At present, the foreign exchange earned by Chinese enterprises in exporting commodities needs to be converted into RMB, and the money converted by banks to enterprises is called foreign exchange appropriation. In other words, foreign exchange account refers to the domestic currency invested by the central bank due to the acquisition of foreign exchange assets such as US dollars. So, what does the decline in foreign exchange holdings mean?

What does the decline in foreign exchange holdings mean?

The decline in foreign exchange holdings means that the domestic money supply has decreased, which has alleviated the inflationary pressure to some extent. In addition, the reduction of foreign exchange will affect the confidence of China's domestic capital market, especially the stability of the financial market represented by the stock market. The decline in foreign exchange led to a decrease in export commodities. Because China exports products with low added value, export enterprises are more vulnerable to the impact of the international market and close down, which increases the possibility of the central bank adopting a loose monetary policy.

Simply put, the reduction of foreign exchange accounts is equivalent to a tight monetary policy implemented by the central bank, and the inflation rate will be reduced. At the same time, domestic liquidity will be tense again. Under the condition of constant interest rate, the increase of real interest rate will inhibit investment. Foreign exchange reserves are usually regarded as the main channel to provide liquidity to the market. If it increases, it means injecting liquidity, if it decreases, the opposite is true.

Generally speaking, the decline in foreign exchange holdings means that the inflation rate will decrease, and the real interest rate will increase when the interest rate remains unchanged, thus inhibiting investment. The decrease of foreign exchange will affect the confidence of China's domestic capital market, especially the stability of the financial market represented by the stock market. However, the decline in foreign exchange holdings is not large and the speed is not fast, which will not have much impact on China's economy.