Prelude To The Battle For Pricing Power In RMB

In the first week of 2016, the fluctuation range of RMB exchange rate was completely led by the foreign currency.

Even some overseas investment institutions once thought that the pricing power of the RMB exchange rate was once "sidelined" to the power of speculation abroad.

In the meantime, the Central Bank of China has intervened in the foreign exchange market several times to stabilize the RMB exchange rate, but with little effect, it failed to prevent the RMB exchange rate from falling sharply.

There have always been two quotations in the RMB exchange rate market, one is the spot exchange rate quoted in the domestic market, and the other is the offshore RMB exchange rate quoted in Hongkong's non deliverable forward foreign exchange (NDF) market. The former reflects to some extent the intention of the Central Bank of China to manage the fluctuation range of the RMB exchange rate, which represents the direction for the future direction of the RMB exchange rate by the overseas institutions. NDF

Since the 8 / 11 remittance last year, the RMB exchange rate spreads in the two markets on the shore and offshore have been expanding, and even become the increasingly fierce competition for the RMB exchange rate.

Behind this, the other is to use the central bank's exchange rate reform policy to fish in troubled waters, and to leverage the leverage investment to sell the international speculative capital of RMB arbitrage, while the other side is defending the renminbi against a basket of currencies.

Stable central bank of China.

"Since August last year, the central bank has intervened regularly in the foreign exchange market to curb the spread of foreign exchange arbitrage and speculative short selling in the renminbi.

In the first ten days of January this year, this kind of multi - space game reached a climax and started a global financial market. "

Zhang Gang, a hedge fund manager in Hongkong, admitted.

In his view, the reason why the exchange rate war is so spectacular is that it reflects the dispute over the pricing power of the RMB exchange rate.

If the domestic RMB exchange rate fluctuation is led by the offshore renminbi, and even the international speculative capital can take advantage of the RMB exchange rate intermediate price marketization mechanism to form the "middle" price fluctuation range, then the domestic RMB exchange rate and the middle price are likely to go down in disorder both under the pressure of continuous short selling of speculative capital abroad, causing massive capital outflow and turbulence in China's financial market, which is the Central Bank of China must not tolerate.

"In fact, the Central Bank of China wants to defend the RMB exchange rate pricing power, not only to maintain the stability of the RMB exchange rate against a basket of currencies, but also create favorable conditions for the successful entry of SDR into the RMB and internationalization process, and the central bank hopes that the renminbi can truly realize the market pricing rather than being manipulated by some market forces."

A foreign exchange trader of a large state-owned bank thinks.

In Zhang Gang's view, the speculative short selling of the renminbi began early in early 2015.

At that time, there was a certain decline in the renminbi.

The reason is that the international speculative capital believes that China's economic slowdown has overestimated the RMB exchange rate, and has begun to sell the renminbi in the offshore market.

But this short selling force is not strong enough, and the largest foreign exchange gap in the renminbi is also around 300 basis points. The central bank does not need to spend a large amount of foreign exchange reserves to intervene in the foreign exchange market, and the RMB exchange rate will soon rebound steadily.

"In retrospect, this is more like a preview of international speculative capital for selling renminbi and competing for the pricing power of the RMB exchange rate."

Zhang Gang believes that many international agencies have been studying various short selling arbitrage strategies around the spread of foreign exchange in the renminbi.

In August 11th last year, the Central Bank of China suddenly adjusted the RMB exchange rate.

With the formation mechanism, the speculative tide of RMB short selling has become active.

Many international speculative capital believes that the central bank's reform measures are mainly aimed at increasing the competitiveness of foreign trade and acquiesce in the competitive devaluation of the renminbi, which has increased the strength of Dagu's empty Renminbi.

For a time, the foreign exchange gap within the RMB once reached more than 1200 basis points, causing the scale of foreign exchange arbitrage pactions to expand continuously, making the RMB exchange rate against the US dollar more than 3% short term.

In Zhang Gang's view, the international speculative capital had already started to seek the pricing power of the RMB exchange rate, because he found a arbitrage pattern to manipulate the RMB exchange rate, that is:

The central parity mechanism of the RMB exchange rate tends to be marketization. First, the offshore RMB exchange rate is substantially reduced, which has led to a sharp fall in the central parity of the second day RMB, thus causing the central bank to acquiesce in the signs of a significant depreciation of the RMB, thus leading to a larger market selling trend and further lowering the market price.

Exchange rate gains higher short selling returns.

The Hongkong bank foreign exchange trader revealed that the central bank also seemed to have an insight into the intention of international speculative capital, and began to increase the strength of the foreign exchange reserve market. Many trading day markets will appear mysterious large renminbi to pay the bill, which will narrow the RMB's decline rapidly.

The market estimates that this is likely to be the central bank's intervention in the foreign exchange market through large Chinese banks, so as to keep up with the RMB exchange rate.

There are institutional estimates that only in August of last year -11, the central bank may use about $100 billion of foreign exchange reserves to intervene in the foreign exchange market to stabilize the RMB exchange rate.

The central bank's intervention in the exchange rate strategy is not complicated, mainly to prevent further depreciation of the RMB exchange rate in the domestic offshore market, thereby driving the offshore renminbi exchange rate to stabilize and rebound, making speculative short selling strategy unprofitable and forcing the bears to go out.

"In fact, this move has also achieved good results, at least in the last -11 months of September, the renminbi has always been on the track of stabilizing and rebound."

The foreign exchange trader recalls.

But it was later discovered that this may be the international speculative capital intended to avoid the central bank's edge. In their view, the main purpose of the central bank's intervention in the foreign exchange market is to allow the RMB to successfully join the SDR at the end of November last year. However, under the pressure of the US dollar entering the interest rate cycle, this intervention in the foreign exchange market measures is not enough to reverse the devaluation of the RMB, but it leads to the central bank consuming a lot of foreign exchange reserves, creating conditions for the subsequent short selling of RMB arbitrage.