The Central Bank Gradually Quantified The Tightening To Maintain The Stability Of The RMB Exchange Rate.

Zhou Xiaochuan encountered "twenty-second military regulations" foreign media guess how much China will spend.

Zhou Xiaochuan had a "twenty-second military regulations" before him.

In order to prevent the rapid devaluation of the renminbi, the governor of the Chinese central bank had to sell the renminbi and sell the US dollar.

Liquidity is exhausted.

This is equivalent to a brake on economic growth, resulting in greater downward pressure on the renminbi, increasing demand for intervention in the foreign exchange market and further draining liquidity.

So reciprocating.

To ensure that the banking system has enough capital to increase loans to the slowing down real economy, the Central Bank of China lowered its reserve requirement ratio and benchmark interest rate this week.

But as the recent situation shows, the reduction of interest rates and the pressure of capital outflow and depreciation mean that foreign exchange intervention is needed. Zhou Xiaochuan may soon face the liquidity strain brought about by this.

"If there is devaluation pressure, but the central bank is unwilling to let the renminbi depreciate, it needs to sell foreign exchange to support the RMB exchange rate," said Yu Yongding, a former member of the economic and monetary expert of the central bank's monetary policy committee.

"One result is

Tighten rather than loose, which in turn will force the central bank to reverse operation.

This also has an international impact: China's selling of foreign exchange is one of the reasons for the recent stock market decline. George Saravelos, global joint head of Deutsche Bank's foreign exchange research, said that the Chinese central bank sold foreign exchange as a "quantitative tightening".

He said investors were wondering how much China's central bank would spend.

At the same time, this situation may prompt other central banks to offset liquidity losses through looser monetary policy than previously expected.

This may mean that the Federal Reserve has postponed raising interest rates, or the Central Bank of Japan and the European Central Bank have bought more bonds.

"It is very difficult to find a global appetite for risk before a quantitative tightening in China finds a solution," Saravelos said.

The Central Bank of China said in a statement explaining the reduction action, that the reduction to 18% on Tuesday was related to the demand for liquidity after the devaluation of the renminbi.

Two weeks ago, in August 11th, the Central Bank of China allowed the renminbi to depreciate the most in 20 years and change the exchange rate mechanism, allowing the market to play a greater role in setting the RMB exchange rate and affecting the global market.

As president of the central bank who has been in office for nearly 13 years, this is not the first time that Zhou Xiaochuan has to face the market.

Since the RMB exchange rate reform in July 2005, he has encountered a wave of capital inflows to bet on the appreciation of the renminbi.

His response is to buy the US dollar and sell the renminbi, leading the moderate but stable appreciation of the renminbi.

However, this requires the central bank to issue additional Renminbi. In order to prevent inflation, the central bank further raised the reserve requirement ratio of banks.

However, for a while.

Despite holding $3 trillion and 650 billion in foreign exchange reserves, if the market unilaterally bet on the depreciation of the renminbi, it may be hard for China to turn the tide.

"We doubt the sustainability of this intervention," said Zhou Hao, an economist at Commerzbank in Singapore.

In July, the central bank and the financial institutions' RMB foreign exchange holdings fell both records, indicating that the capital outflow rate was accelerating, and the central bank's behavior to support the RMB exchange rate strengthened the intervention in the foreign exchange market.

"If the central bank issued a sharp decline in foreign exchange reserve data at the end of 8 in September, such as a reduction of US $200 billion, that would be very painful for the central bank," said Chen Xingdong, chief China economist at Paris bank in Beijing.

He said that the Central Bank of China may have to change its gradual depreciation policy by November.

Since the depreciation of the renminbi in August 11th, the Central Bank of China has been maintaining the stability of the RMB exchange rate by selling dollars.

China's foreign exchange reserves have decreased by 7.9% in the past year and $3 trillion and 650 billion at the end of 7.

According to the median estimate of 28 economists surveyed by Peng Bo this month, the rest of the year will be reduced by about $40 billion a month due to intervention by the central bank.

Twenty-second military rules

This is not the only predicament facing Zhou Xiaochuan: cutting interest rates may cause more capital to flow into overcapacity state-owned enterprises and increase deflationary pressure.

At the same time, according to the paradox of savings, the deterioration of the economic environment and the decrease in interest on deposits may prompt the thrifty Chinese to save more money.

If China's central bank can sustain confidence through sustained monetary policy, Zhou Xiaochuan may be able to find a way out of "twenty-second military rules".

The current devaluation is mainly due to capital outflow and lack of confidence in the fundamentals of China's economy.

Finally, it can strengthen the market's confidence in RMB.