Don'T Worry About The RMB Diving.

China's central bank (PBOC) unexpectedly announced a fall on Monday (February 29th), causing a great uproar in the market.

The pressure of RMB devaluation has returned, offshore and offshore RMB exchange.

The short jump is over 100 o'clock.

The Central Bank of China announced that since March 1, 2016, the RMB deposit reserve ratio of financial institutions has been generally reduced by 0.5 percentage points, so as to maintain a reasonable and abundant liquidity in the financial system and guide the steady growth of monetary and credit, thus creating an appropriate monetary and financial environment for the structural reform of the supply side.

Central bank accident easing, RMB

With pressure coming back, the offshore and offshore renminbi dived against the US dollar more than 100 points.

Offshore RMB against the US dollar reached a minimum of 6.5592, while the onshore RMB against the US once dropped 6.5550..

Huang Yi, head of foreign exchange trading at GFB, said that the central bank announced that it would not affect the exchange rate too much, but did not exclude the market from taking short-term speculation.

He said: "the recent reverse repurchase is too large, and the current renminbi is tight, and it has its own demand."

This is corresponding to the increase of the deposit rate in the process of RMB appreciation, and more is the result of the depreciation of the renminbi. "

Hu Weijun pointed out that "reduction is aimed at solving short-term liquidity tensions.

Reverse repo operation pressure is large.

The impact on the RMB exchange rate is not large, and the change of US dollar index will be more significant than that of real estate.

He believes that "compared to reverse repurchase, the reduction of the RMB is more conducive to easing the tension of the capital market, and the easing signal is stronger."

Hu Weijun, chief economist of Macquarie Group in Greater China, said that the reduction was not the same as the message that the Central Bank of China did not want to cut interest rates.

Shen Jianguang, chief economist of Mizuho Securities Asia, predicted that "the short-term trend of RMB pressure is mainly due to the relaxation of demand in the domestic market. Meanwhile, the UK's withdrawal from Europe and the economic uncertainty of European countries are increasing, and the US dollar is still strong."

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The central bank, which carries out the negative interest rate, hopes to encourage the capital to enter the real economy and further improve the level of leverage.

But in the view of HSBC, they are making a big mistake. Negative interest rates actually play a role in deleveraging.

HSBC analyst Anton Tonev wrote in a report that traditional theory holds that the central bank is the basic interest rate setter, and the negative interest rate is the product of low inflation and low economic growth.

But HSBC believes that negative interest rates may be the market's reaction to excessive leverage.

In April last year, Switzerland became the first country to issue a negative interest rate 10 year treasury bond. As at the end of last year, the euro area's newly issued treasury bonds had a negative yield of about 1/3.

If investors hold the maturity of these bonds, the funds recovered will be lower than the original investment, and the final repayment amount of the bonds issuers will be lower than the original loans.

In this case, the negative interest rate has actually become an effective tool for deleveraging, HSBC said.

The report reads:

We understand that one of the problems faced by this view is that this policy (negative interest rate) aims to encourage increased leverage, such as the example of the Swedish property market.

Most of the countries whose treasury bond yields are negative are either high in government debt or high in private sector debt (or both).

Historically, yields on treasury bonds have tended to rise, thereby hindering the issuance of more debt.

But this is not the case now. Why? We think that because of the high level of debt and the urgent need of deleveraging, the nominal returns of these countries are getting lower and lower in the negative range to encourage more debt issuance.

HSBC said it also suggests that the market may think too much debt.

But credit creation is very important for the normal operation of the economy, and the vast majority of credit creation in developed countries is lending through the private banking system. If market demand for debt does not exist, then the whole credit creation process will collapse.

But there is also a natural limit on the size of debt that an economy can maintain.

After the financial crisis in 2008, the global economic growth slowed down, and banks were not only finding it difficult to find people willing to lend money, but also the public began to lower their leverage.

The situation in the United States and most developed countries after 2008 is similar to that in most of nineteenth Century and in the early twentieth Century. It is facing a deflationary environment and unable to boost the money supply to raise inflation.