Banks cut interest rates on U.S. dollar deposits to help stabilize RMB exchange rate
Recently, a number of major banks have cut interest rates on US dollar deposits.
Institutions and analysts believe that although the banks lowered the US dollar deposit interest rate is a market-oriented decision based on their own business needs, from the perspective of objective impact, this will help to “cool down” the unilateral appreciation of the US dollar in the exchange rate market and bring the market back to normal. Rational normality has positive significance for the current exchange rate stabilization. This move will also reduce the competitive competition of market institutions for US dollar deposits, which is conducive to maintaining the order of the domestic US dollar deposit market, which in turn is conducive to the stability of the RMB exchange rate.
Alleviate the “inversion” of US dollar deposit and loan interest rates
It is positive for the stability of the exchange rate
Bank of China( 3.980 , 0.07 , 1.79% ) Zhou Quan, general manager of the Assets and Liabilities Management Department, told the Shanghai Securities News reporter that since last year, domestic commercial banks have priced US dollar deposit interest rates. up. But at the same time, the demand for US dollar loans is relatively insufficient, the upward speed of loan interest rates is lower than that of deposit interest rates, the net interest margin continues to narrow, and even the deposit and loan interest rates “invert”.
U.S. dollar deposit rates have soared since the beginning of last year. According to the China Monetary Policy Implementation Report for the first quarter of 2023, in March, interest rates for demand deposits, one-year deposits, and large U.S. dollar deposits with a maturity of more than one year were 1.64%, 5.67%, and 5.54%, respectively. Compared with the same period last year (0.12%, 1.52% and 1.44%), this group of values increased significantly by 152, 415 and 410 basis points respectively. At the same time, in March, the average interest rate of one-year US dollar loans was 5.34%, and the deposit and loan interest rates of the same period have been “inverted”.
Since the beginning of this year, some banks have experienced several rounds of reductions in the US dollar deposit interest rate, and have generally entered a downward channel.
In the eyes of market participants, lowering the interest rate on US dollar deposits at the current point of time has positive significance for stabilizing the exchange rate. Zhang Yu, assistant director of Huachuang Securities Research Institute and chief macro analyst, believes that the bank’s lowering of the US dollar deposit interest rate is a market-oriented decision based on its own business needs. From the perspective of impact, this move will reduce market institutions’ competition for US dollar deposits. , which is conducive to maintaining the order of the domestic US dollar deposit market, and is objectively conducive to the stability of the RMB exchange rate.
“Reducing the interest rate on U.S. dollar deposits will also help to ‘cool down’ the unilateral appreciation of the U.S. dollar in the exchange rate market and bring the market back to a rational normal,” Zhou Quan said.
Currency exchange arbitrage may outweigh the gains
Recently, the high interest rate on US dollar deposits and the appreciation of the US dollar against the renminbi have made some market players see arbitrage opportunities. For example, on June 30, the one-year US dollar deposit rate of a major bank was 2.8%, which was less than 1 percentage point difference compared to the RMB deposit rate of the same term. Previously, some depositors first converted RMB into US dollars and then deposited them in US dollars, trying to earn high interest returns and exchange gains from RMB depreciation at the same time.
“Historical experience proves that the results of this approach may outweigh the gains.” Zhou Quan said that in recent years, the flexibility of the RMB exchange rate has increased significantly. The gains from interest rate differentials between renminbi deposits and U.S. dollar deposits are easily offset by exchange rate fluctuations.
Zhou Quan said that the RMB exchange rate will not continue to depreciate unilaterally. Some market institutions predict that the exchange rate of the RMB against the US dollar may rebound to 6.8 in the second quarter of 2024. At present, customers who conduct the above-mentioned arbitrage through US dollar deposits may face considerable losses.
“When enterprises and residents allocate assets, they should not blindly pursue high interest rates on U.S. dollar deposits, but also consider exchange rate fluctuations.” Zhang Yu said that since China’s exchange rate reform in 2015, the volatility of the RMB exchange rate has approached the world’s mainstream developed currencies , the variance fluctuation range between the highest point and the lowest point of the exchange rate is about 5% to 10% every year, which is much higher than the interest rate difference of 1 percentage point.
“In recent years, relevant national departments and commercial banks have been guiding customers to follow the concept of exchange rate risk neutrality, manage their US dollar positions based on real needs, and not bet on the unilateral appreciation or depreciation of the RMB exchange rate, otherwise they may face huge exchange rate risks. “Zhou Quan said.
There is no backlog of appreciation and depreciation pressure on the RMB exchange rate
Zhang Yu believes that at present, there is no backlog of appreciation or depreciation pressure on the RMB exchange rate, and there is no so-called historical debt problem. The RMB exchange rate is already at a relatively reasonable pricing level, which is the result of objective and transparent transactions based on external market fluctuations and internal market supply and demand, and there is no great value deviation. Many indicators such as my country’s trade competitiveness, global export share, and interest rate differential between China and the United States can support this judgment.
( 9.950 , 0.08 , 0.81% )
“Looking forward, China’s economy generally maintains a steady upward trend, while some market institutions predict that the US economy may face a mild recession. At the same time, as the Fed’s interest rate hike cycle draws to a close, the strengthening of the US dollar is difficult to sustain, and the spillover impact is expected to weaken Overall, my country’s foreign exchange market is expected to maintain a relatively stable operation.” Pan Gongsheng said.
Looking forward to the trend of the RMB exchange rate in the next stage, Zhang Yu said that in the short term, the People’s Bank of China has made it clear that it will implement comprehensive policies, stabilize expectations, and resolutely prevent the risk of large fluctuations in the exchange rate. It will form a better support for the short-term stability of the market.
In the medium term, the trend of the RMB exchange rate is related to the trend of the U.S. dollar index and the trend of the euro, which has the greatest impact on the U.S. dollar index, and is also affected by my country’s domestic economic situation. Judging from the above situation, the exchange rate prices in the past two months have fully reflected the market’s reaction to this round of Fed’s policy hawkishness. “Now that the RMB exchange rate is overly pessimistic, linear miscalculations are prone to occur, and it is more necessary to return to the fundamentals themselves.” Zhang Yu said.
In the long run, the basis for determining the RMB exchange rate is my country’s economic fundamentals. my country’s economic fundamentals still have good resilience and momentum.