The micro foundation is more solid and the resilience of the foreign exchange market is highlighted.

“The foreign exchange derivatives trading business limit is 5 billion U.S. dollars or the equivalent in other currencies” and “it is planned to use its own funds not exceeding 20 million U.S. dollars or the equivalent in RMB to carry out foreign exchange derivatives trading business”... Since February, BYD, Tongxiang Many listed companies such as Technology have issued announcements to respond to changes in market exchange rates with exchange rate risk management methods.

The mature response of enterprises and other business entities is the micro-foundation of the current resilience of the foreign exchange market. For some time, the RMB exchange rate has become more volatile and more flexible. The industry believes that factors such as Sino-US interest rate differentials and fluctuations in the US dollar index will still bring about periodic exchange rate fluctuations, but the use of exchange rate hedging tools and the improvement of the level of RMB internationalization are expected to become important assistance for business entities to cope with external shocks.

“Adaptability” to exchange rate fluctuations has significantly improved

Exchange rate changes are directly related to the bargaining power and cost-effectiveness of foreign trade companies, and have multi-dimensional impacts on corporate production and operations. Foreign exchange derivatives transactions can reduce the impact on the company when exchange rates fluctuate significantly.

According to incomplete statistics from a reporter from the Shanghai Securities News, since this year, nearly 20 listed companies have issued announcements to launch foreign exchange derivatives transactions in 2024, including China Heavy Industries, Yaopi Glass, Nanjing Iron and Steel Co., Ltd., Yaben Chemical, Hengguang Co., Ltd. Jinko Technology, MCC, etc.

The reporter learned from the industry that as exchange rate fluctuations continue to increase, the purpose of enterprises conducting foreign exchange derivatives transactions is mostly to lock in costs, avoid and prevent exchange rate and interest rate risks, and their types include forward foreign exchange settlement and sales, and RMB foreign exchange swaps. , RMB foreign exchange options, etc.

BYD stated in the announcement that the company and its holding subsidiaries conducting appropriate foreign exchange derivatives trading business can improve their ability to actively respond to foreign exchange fluctuation risks, better avoid exchange rate risks and interest rate risks, and enhance financial stability.

The strengthening of foreign exchange risk response by business entities is closely related to their own operations. BYD stated that as the company and its holding subsidiaries continue to expand their overseas business, the scale of foreign exchange receipts and payments has also increased simultaneously. The mismatch in currency types and periods of receipts and payments has continued to expand foreign exchange risk exposure.

Regarding the purpose of carrying out foreign exchange derivatives business, Tongxiang Technology stated that as the company's business scale expands, export business and foreign exchange settlement volume increase, the company plans to carry out foreign exchange derivatives trading business to achieve asset value preservation for the purpose of avoiding risks. Business types include but are not limited to forward foreign exchange settlement and sales, foreign exchange swaps, etc.

The micro-foundation of exchange rate stability is more solid

"If an enterprise mishandles exchange rate issues, it may have been profitable, but it may still be a loss." Zhu Hexin, deputy governor of the People's Bank of China and director of the State Administration of Foreign Exchange, recently emphasized the importance of exchange rate risk management at a press conference.

Looking back at the operation of the foreign exchange market over a period of time, the increasing awareness of corporate exchange rate hedging is a significant feature.

Pan Gongsheng, governor of the People's Bank of China, recently introduced at a press conference of the State Council Information Office that currently, the foreign exchange hedging ratio of enterprises is about 25%. At the same time, the proportion of RMB in cross-border trade receipts and payments has reached about 25%. Pan Gongsheng said that the use of exchange rate hedging tools has become more widespread and the level of international use of the RMB has increased rapidly, allowing business entities to better respond to external shocks and exchange rate changes.

At the same time, foreign exchange transactions remain rational and orderly. Data from the State Administration of Foreign Exchange show that the willingness of enterprises and other entities to settle and purchase foreign exchange is relatively stable. In December last year, both the settlement exchange rate (the ratio of foreign exchange sold by customers to the bank and the customer's foreign exchange income from foreign affairs) and the purchase exchange rate (the ratio of foreign exchange purchased by customers from the bank to the customer's foreign exchange expenditure) were both the same as the monthly average level in the first 11 months of 2023. Basically the same.

From a policy perspective, in recent years, financial management departments have continued to guide operating entities to establish a risk-neutral concept and strengthen exchange rate hedging methods. On the other hand, they have encouraged banks to innovate products and service channels and continue to optimize foreign exchange facilitation policies.

Recently, the State Administration of Foreign Exchange issued the "Management Measures for Banks' Foreign Exchange Business Development (Trial)" to promote the reengineering of commercial banks' foreign exchange business processes and further enhance banks' foreign exchange business development capabilities. The Measures have launched a number of practical measures to promote cross-border trade and investment and financing facilitation, including providing a general framework for foreign exchange business facilitation, giving banks more room for product innovation, and flexible policy application, etc.

"The operation of China's foreign exchange market is more resilient, market participants are more mature, and the regulators of the foreign exchange market are more calm and experienced in facing market changes." Pan Gongsheng said.

The foreign exchange market has become more resilient

The increasing fluctuations and enhanced flexibility of the RMB exchange rate are the general background for the improvement of the "adaptation" of participants in the foreign exchange market.

Since last year, under the dual impact of continued interest rate hikes by major overseas economies and the tortuous recovery of the domestic economy, the RMB exchange rate once hit a new low in the past 16 years. Subsequently, driven by the easing of internal and external factors, the RMB turned around again at the end of the year and hit a six-month high.

Since the beginning of this year, the RMB exchange rate has continued to maintain a stable trend. The market expects that the Federal Reserve will most likely cut interest rates this year, and the external pressure on the RMB exchange rate may be reduced. At the same time, since the beginning of the year, policies such as reserve requirement ratio and interest rate cuts have been implemented, which has fundamentally laid a solid foundation for exchange rate stability.

Wang Tao, head of Asian economic research and chief China economist at UBS, said that looking into the future, fluctuations in Sino-US interest rate spreads, US Treasury bond yields and the US dollar index may still bring about periodic fluctuations in the RMB exchange rate. In the medium term, considering that China's economic growth momentum will stabilize and the Federal Reserve's interest rate cuts are expected, the RMB exchange rate is expected to fluctuate around 7.1 by the end of 2024.

Regarding the basic environment facing the RMB exchange rate in 2024, Wang Jinbin, a researcher at the National Academy of Development and Strategy, said that China and the United States’ monetary policies are deeply misaligned, but the degree of deep misalignment will be alleviated in the second half of 2024; China’s economic growth is expected to be better than that of the United States Economic growth is expected; China's total trade surplus remains at a relatively high level; the US dollar will be relatively strong in 2024, but may not be as strong as in 2023; China's high-level opening up will enter a new stage in 2024, and it will adopt higher quality and greater efforts to attract foreign investment. Huazhan industry prospered.

On this basis, Wang Jinbin believes that the RMB exchange rate will operate at a reasonable and balanced level in 2024, and may show a slight appreciation throughout the year amid two-way fluctuations.