Three Rounds Of QE Influence China Gradually Weakened, The RMB Will Not Depreciate Greatly.

Limited impact on China's monetary policy

In the past 6 years, with the introduction of the three rounds of QE, China's monetary policy has changed accordingly.

The extreme easing from 2008 to 2009 and the tightening policy which began in 2010, the impact of the depreciation of the US dollar against the renminbi on China's economy is one of the important factors.

Time goes back to early 2008.

At that time, in order to curb overheated economy, the central bank's monetary policy was still tight.

In 1-5 months, the central bank raised the deposit reserve ratio for 4 times, and by May 20th, it has increased to 16.5%.

In September, after the outbreak of the financial crisis, the Central Bank of China began to cut interest rates and deposit reserve ratio, but the mood of bank lending did not follow.

In November 25, 2008, the Fed announced for the first time that it will buy institutional bonds and mortgage backed bonds (MBS), marking the beginning of the first round of QE.

The QE1 ended in March 2010, during which the Fed purchased $1 trillion and 725 billion of bonds, including $1 trillion and 250 billion MBS, $300 billion of US Treasury bonds and $175 billion of institutional bonds.

As a result, the RMB pegged to the US dollar entered the appreciation channel. In 2008, the RMB exchange rate rose to 6.3% against the US dollar, rising by 0.1% in 2009 and 3% in 2010.

The appreciation has brought obvious pressure to China's foreign trade related enterprises.

Therefore, in order to stimulate economic growth and increase liquidity, in the first quarter of 2009, China began to implement the 4 trillion plan, which led to a significant increase in money supply. The growth of money supply in the four quarters of that year was 25.51%, 28.46%, 29.31% and 32.4% respectively, and the annual M2 growth rate was 28.52%.

4 trillion, the GDP growth was quickly driven, but at the same time, China began to face a new problem, inflation.

Since March 2010, the Central Bank of China has raised the deposit reserve ratio of RMB deposits by financial institutions for four times by 0.5 percentage points.

At the end of December, the central bank raised again.

RMB deposit and loan benchmark interest rate.

"The emergence of severe inflation is precisely due to the weakening of the US dollar. If the exchange rate is sufficiently flexible and the RMB can appreciate in a timely manner, the domestic inflation pressure will also ease."

Lu commissar thinks.

When China's monetary policy shifted from moderate easing to stability, in November 2010, the Federal Reserve launched the QE2 to boost the economy.

From November 2010 to June 2011, the Federal Reserve bought us $75 billion in long-term US Treasuries every month, totalling US $600 billion.

In September 2012, the Federal Reserve opened the QE3 to further support the economic recovery and the labour market.

A monthly purchase of US $40 billion MBS does not end the time, and sells short term treasury bonds and buy longer term treasury bonds.

From December of that year, the Fed purchased $45 billion a month instead of the reverse operation at the end of December, plus a monthly MBS of 40 billion US dollars, and the Fed's monthly assets purchases amounted to $85 billion.

However, in the past two years, China's monetary policy has not changed significantly.

In May 2012, the central bank lowered the reserve requirement by 50 basis points, but since then, interest rates and deposit reserve rates have not been adjusted.

Liu Ligang, chief economist of the Greater China region of ANZ, has pointed out that China's monetary policy may be too tight relative to the economic fundamentals.

"Next China

How to go, mainly the influence of domestic factors, the main force of the central bank on the directional control, through the combination of a variety of monetary policy to fine tune.

As long as the GDP does not deteriorate, it will not reach the stage of drainage. "

Chen Xianming, head of Research Department of Taiping securities (Hongkong), concluded that the end of QE will have limited impact on China's monetary policy.

With the launch of QE, the US dollar accelerated its depreciation and the renminbi appreciated further.

From the fourth quarter of 2010 to the third quarter of 2011, the market maintained an appreciation of the renminbi, but the increase in the intermediate price was relatively slow. In the following year, the RMB exchange rate against the US dollar touched down several times, but the middle price continued to appreciate slightly.

Since April 2013, the renminbi has entered an accelerated appreciation channel.

Xie Yaxuan, director of macroeconomic research at China Merchants Securities Research and development center, concluded that the end of QE and its expectations have led to a strong US dollar and the weakness of many currencies. International capital flows from many emerging economies will affect the RMB exchange rate and China's balance of payments situation in stages.

Chen Xianming believes that after the end of QE, the market's expectation of RMB appreciation will be changed and adjusted, but "the RMB will not depreciate or fluctuate greatly because of the end of QE".

In the short term, however, the impact on China's capital flows is still limited.

Ren Zeping, chief macroeconomic analyst of Guotai Junan macro securities, believes that the current slow gap between China and the US will slow the massive outflow of capital for the time being.

Lu commissar also believes that the end of the QE, even if it will affect China's liquidity and capital flows, but the Central Bank of China has a response tool, not a major problem. "(commercial banks) deposit reserve ratio of 20%, the central bank can reduce the deposit reserve ratio to hedge capital outflows."

"The key issue is flexibility in exchange rates."

The political commissar of the government believes that the RMB exchange rate regime is not flexible enough, which is a more significant hidden problem.

The real effective exchange rate of RMB is overvalued and there is no devaluation (over 3% or more than half a year). The market still believes that the renminbi will not depreciate and the adjustment space will be limited.

"Since the appreciation of the renminbi, the volatility has widened, but the volatility has not changed substantially because the volatility of the intermediate price is too small."

Lu commissar pointed out that the fact that the RMB is still lacking in flexibility should consider expanding the daily fluctuation of the intermediate price.