China's International Capital Flows And RMB Exchange Rate Outlook In 2015

After the exchange reform in March 2014, the monthly average value of newly increased foreign exchange holdings in financial institutions from April to October was 20 billion yuan, while the average monthly increase in foreign exchange held by the central bank in April to September was -21.9 billion yuan. Simply copying this experience, we predict that in 2015, financial institutions will increase their monthly foreign exchange reserves by 20 billion, from 0 to 500 billion in the whole year. The above prediction has two risk points: first, the central bank may be forced to resume its daily intervention in the foreign exchange market, for example, in December 2012, as we mentioned in the "fantastic drift" of the new foreign exchange fund, the central bank will resume its intervention (whether for sustained devaluation pressure and appreciation pressure), and foreign exchange will reappear hundreds of billions of monthly increase in volume. Of course, in the past, the main pressure of appreciation was RMB, and foreign exchange accounted for a continuous increase. The negative growth situation rarely appeared. But in the future, as the RMB exchange rate approaches the equilibrium interval, the central bank's behavior to stabilize the RMB exchange rate and enter the market to sell us dollars will reduce the situation of foreign exchange holdings. Two, the possible impact of RMB capital account convertibility reform and RMB internationalization process. These two processes are closely related and may have some impact on the balance sheet of the central bank. Therefore, the anticipation of foreign exchange is also very important and needs close attention.

　　 foreign exchange Low growth in capital accounts does not mean a decline in the volatility of China's international capital flows.

The above judgment of low growth rate of foreign exchange will give rise to a question: does the international balance of trade and the international capital flow brought by domestic and foreign spreads do not bring fluctuations in foreign exchange? The answer is true. As long as the central bank insists on not interfering in the foreign exchange market, foreign exchange holdings will maintain a low growth trend. This means that we need to make two important changes in the analytical framework in the future: first, the change of observation indicators. International capital flows, which are brought about by trade balance and spreads, will still fluctuate as the tide rises and falls. Moreover, in the process of financial globalization and the gradual upgrading of capital account convertibility in China, its importance is also rising. Therefore, it is necessary to rediscover the best index to observe China's international capital flows instead of foreign exchange. The two is the change of transmission channel. In the past, international capital flows affected the balance sheet of the central bank through foreign exchange, and then affected the interbank liquidity. In the future, international capital flows will change the situation of foreign exchange and deposit and loan, and affect the balance sheets of enterprises and individuals as well as commercial banks. Below, we will analyze the above two questions respectively.

　　 Two international capital to be concerned about in the future Flow index

We believe that in the future, instead of foreign exchange, the index of China's international capital flows is bank receipts and foreign currency payment data and RMB cross-border movement data.

According to the standard of the State Administration of foreign exchange, "the payment of foreign currency on behalf of banks" refers to the collection and payment between domestic banks and non resident organizations and individuals, which excludes the cash receipts and payments and the bank's own foreign payments. It includes: cross border receipts and payments (including foreign exchange and Renminbi) occurring between non banking sector and non residents through domestic banks, as well as domestic receipts and payments paid by domestic banks between non banking sector and non residents (excluding Renminbi receipts and payments between domestic residents and domestic non resident individuals). Payment by banks is an integral part of the balance of payments statistics. It adopts the principle of capital collection and payment system, and it only reflects the flow of funds between the non banking sector and non residents in the territory. It can not reflect physical transactions and bank's own foreign transactions, and the statistics range is less than the balance of payments statistics. As defined by other indicators published by the safe, it is hard to understand. However, we try to make a metaphor to help you understand: the bank's behalf on foreign payments (hereinafter referred to as foreign payments) represents to a large extent the international capital flows between China and abroad, such as the high voltage current transmitted by high voltage; the foreign exchange occupation of financial institutions belongs to the capital flow generated by currency exchange between domestic non banking departments and banking departments (central bank plus commercial banks), such as the standard 220V current; in the meantime, the central bank and commercial banks are substations. Before the reform, the central bank acts to stabilize the RMB exchange rate, which will convert most of the foreign exchange into domestic exchange into foreign exchange, just like this substation converts the input high voltage into a standard voltage current. At this time, the high voltage current is basically the same as the converted standard voltage and current. It can be seen from the following figure that the foreign receipts and payments are in the same direction as the change direction of foreign exchange accounts. In the future, the central bank has promised to withdraw from the daily intervention of the foreign exchange market, and the substations will basically cease to operate and no longer convert and output current. Then the representation of foreign exchange funds will decrease to the international capital flows, and the importance of directly observing the changes in foreign payments and payments will rise.

Data in October 2014 showed that foreign exchange financing of financial institutions increased by +661 billion, and the ratio rose. The foreign exchange receipts and payments deficit in the same period also amounted to -1673 billion. The data of the two groups were positive and negative. We believe that if we understand our discussions above, we should be clear that the current representation of foreign exchange capital has severely decreased, and the international capital inflow shown in October is a false impression. The international capital outflow in September and October, which is shown by foreign payments and foreign exchange settlement deficits, is the real situation.

　　 RMB Cross boundary data as an international currency is another important indicator that needs attention.

Among them, the RMB cross-border payment statistics have been included in the foreign payment data through banks. In the first three quarters of 2014, the proportion of RMB cross-border income and expenditure accounted for nearly 25% of the total cross-border income and expenditure, mainly under trade terms and direct investment transactions. In the future, with the progress of RMB capital account convertibility process, more transactions will use Renminbi, and the impact of cross border mobility needs to be concerned and studied. From another dimension, as we emphasized in the Chinese version of the puzzle of interest rate, the situation of holding renminbi assets in China by foreign institutions and individuals for the first time released by the people's Bank of China in the 2014 general survey of monetary statistics is especially noteworthy. As banks' foreign payments statistics do not include the external transactions of financial institutions themselves, the international capital flows of stocks and bonds purchased by foreign central banks, overseas RMB clearing banks and participating banks directly into China and the inter-bank bond market can only be observed through the situation of "domestic renminbi financial assets held by overseas institutions and individuals" released by the people's Bank of China.

Whether from the international experience of developed and emerging markets or from the experience of RMB internationalization in China, the participation of foreign investors in the bond market will increase in the process of internationalization of RMB. According to the study of the International Bank of clearing (BIS) and the International Monetary Fund (IMF), for emerging economies, the percentage of foreign investors in their bond market will increase by 1 percentage points, which will reduce their long-term treasury bond interest rate 6-9BPS; the Portuguese central bank's research on the euro area is that, from 2000 to 2006, the percentage of foreign investors in the euro area bond market will increase by 1 percentage points, which will reduce the yield of their long-term treasury bonds 13BPS; in 2012, a Federal Reserve Research Report on the United States concluded that if foreign investors buy more than 100 billion of US Treasury bonds every month, the interest rate of us 5 year treasury bonds will descend to 20BPS. It can be seen that after the internationalization of money, the proportion of foreign investors in a country's bond market will rise, which will depress the long debt yield of a country in a relatively long trend. China is also beginning to face the same prospect. We have discussed in the Chinese version of the puzzle of interest rate. With the internationalization of RMB in recent years, foreign investors' holdings of RMB in China's interbank bond market have increased from 1.7% in the interbank bond market to 2.4% at the end of 10, which has increased by 0.7% percentage points. So, it has contributed to the downward trend of treasury bond yields this year. In the future, foreign institutional investors will have a significant impact on China's treasury bond yields and overall asset prices in the course of RMB internationalization in the course of RMB internationalization and the resulting international capital flows. This is also the core purpose of our statistical index of cross-border movement of RMB.