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how can we say that about the PRC?
Because it was said by a PRC policy wonk first… We’ve been tracking and mapping PRC policy and opinion, translating key documents and keeping abreast of the discourse for well over a decade. We’ve amassed tens of thousands of stories— parsed for credibility and relevance that underpin our methodology…
Who wouldn’t dare?
Following our post on exchange rate controls, you will find below writing from PRC columnists who cover investment and exports—major drivers of the COVID economy— about how they have fallen in recent months and how China is handling this shift.
export and import growth turned negative in October
Sina Finance | 8 November
context: With a new round of COVID-19 resurgence sweeping through major PRC cities as winter is approaching, possible production disruptions are expected to further weigh on exports while domestic demand shows no sign of recovery. Trade growth in the coming months is expected to continue going down the curve.
Customs data released on 7 Nov 2022 show that export and import growth (dollar-denominated) dropped by 0.3 and 0.7 percent respectively in October, with the total trade surplus standing at $US85.15 bn (exports and imports grew by 7 and 6.8 percent respectively in RMB terms). The decline can be attributed to a high base effect from last year that doubled with contracting global demand as developed economies enter a cyclical recession.
A few bright spots in exports stood out, including automobiles (up by 103.5 percent y-o-y), cellphones (15.2 percent), and travel-related goods, such as shoes (10 percent) and luggage (28.2 percent). But overall exports of mechanical and electrical products declined by 0.7 percent y-o-y, while labour-intensive goods exports also pulled down total export growth by one percentage point in October.
Besides sluggish domestic demand, import growth is dampened by sliding prices of bulk commodities, especially iron ore. The import volume of iron ore increased by 3.7 percent y-o-y in October while its total import value dropped by some 27 percent y-o-y. On the contrary, crude oil beefed up the overall import figure by 4.2 percentage points thanks to rising prices amid war-induced supply shortages.
another move to support the RMB
Jiemian | 24 October
context: The macro-prudent adjustment parameters for corporate cross-border financing control the amount domestic firms can borrow from overseas funds. The higher the parameter, the more money can be borrowed, creating more capital inflows and demand for RMB. The PBoC lowered the parameter in December 2020 when the RMB was appreciating.
PBoC (People’s Bank of China) and SAFE (State Administration of Foreign Exchange) on 25 October increased the macro-prudent adjustment parameters for corporate and financial institution cross-border financing from 1 to 1.25. The move is meant to slow the rapid RMB depreciation.
The market pays attention to key exchange rate points such as 7.2 and 7.3 against the US dollar, notes Ren Tao 任涛 International Bank of Macau, so when the exchange rate draws near, market distortions are amplified. The move by the PBoC after the rate passed 7.3 is meant to stabilise market expectations, he explains.
Moving forward, if the depreciation does not end, the PBoC has more tools in its toolbox, according to Wang Qing 王青 China Orient Golden Credit Rating chief macro analyst. These include the ability to
increase the scale of central bank bill issuance in the Hong Kong market
lower the macro-prudential adjustment factor for overseas lending by enterprises to control capital outflows
officially announce the restart of the counter-cyclical factor
adjust the foreign exchange deposit reserve ratio
central bank raises forex risk reserve ratio
Jiemian | 26 September
context: The forex risk reserve ratio has been used in the past to adjust the RMB exchange rate based on the central bank’s needs. In September 2017 when the RMB was appreciating against the USD the rate was reduced to zero while it was raised to 20 percent in August 2018 to fight depreciation. The most recent move was in October 2020 when it was reduced to zero again to fight appreciation after the post-COVID surge in the RMB’s value as investment and exports soared.
Following the move to decrease the foreign exchange deposit reserve ratio, PBoC (People’s Bank of China) announced that it will raise the forex risk reserve ratio to zero for forwarding foreign exchange sales from 0 percent to 20 per cent, effective 28 Sep 2022. The RMB broke the ‘7’ threshold against the USD in mid-September as Federal Reserve rate hikes and PRC domestic issues affect the exchange rate. Wu Chaoming 伍超明 Chasing Research Institute deputy director noted that the central bank wants to send a signal that it will support the RMB, thus stabilising its fall while also cracking down on attempts to short the RMB. Raising the forex risk reserve ratio makes it more expensive for firms to bet against the RMB.