What Factors Affect Currency Hedging?

Hedging monetary policy means that in the context of large-scale international capital inflows, the central bank of the country adopts corresponding quantitative and / or price-type monetary policy tools to regulate domestic money supply and financial market conditions, thereby maintaining stable domestic macroeconomic operations.

Hedging monetary policy

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Hedging monetary policy means that in the context of large-scale international capital inflows, the central bank of the country adopts corresponding quantitative and / or price-type monetary policy tools to regulate domestic money supply and financial market conditions, thereby maintaining stable domestic macroeconomic operations.

Historically, hedging monetary policy has its origins in two backgrounds: the central bank has established itself as the basic regulator of domestic macroeconomic stability; the national economy has been increasingly open to the outside world, and large-scale, regular cross-border capital flows have occurred internationally. Many economies have adopted hedging-type monetary policies aimed primarily at short-term international capital flows. However, as in recent years, China's long-term implementation of hedging-type monetary policies mainly on the basis of continuous "double surplus" capital inflows is still rare. Hedging monetary policy operation is basically a demand management policy with a strong Keynesian color. After the 1830s, economists represented by Keynes put forward a severe critique of the classical school that advocated automatic market adjustment, and began to seek new ideas. The literature that systematically explores hedge-type monetary policy appeared in the 1960s, and is linked to theories such as the "ternary paradox" ("Impossible Triangle Theorem").

Chinese name

Hedging monetary policy

Background

Mass inflow of international funds

History

Hedging monetary policy stems from two backgrounds

put forward

Classical school

Internationally, many countries have faced a situation of sustained trade surpluses and capital inflows. In this context, hedging operations have been used to try to maintain both the fixed exchange rate and the domestic policy goal of preventing inflation. Germany (formerly Federal Republic of Germany before 1991) and Japan are two representative examples of advanced economies. Since the 1980s, there have been some cases in which developing countries and emerging market economies have used hedging monetary policies extensively. Germany's countermeasures against capital inflows include a limited shift to a floating exchange rate regime, the implementation or retention of some capital inflow restrictions, the implementation of credit control and currency growth targets, and the development of open market operations. The implementation of the monetary aggregate and its growth target policy is a feature of Germany, which has achieved far better results in controlling inflation than other industrialized economies. Bernanke and others believe that Germany's monetary aggregate target system is the forerunner of the inflation target system. ^[1]

The overall thinking and principles of hedging monetary policy operations are as follows: through rational arrangement of the combination of monetary policy tools, maturity structure, and operational strength, strengthening the hedging of foreign exchange inflows, maintaining a reasonable and appropriate liquidity of the banking system, and guiding the reasonable growth of total monetary credit. Against the background of the rapid growth of foreign exchange accounts, in order to control the domestic money supply and curb inflation, the People's Bank of China offsets this type of balance of payments surplus through open market operations, raising the statutory deposit reserve ratio, and refinancing. The resulting passive money supply changes, thereby maintaining price stability and thereby promoting economic growth. ^[1]

We conducted a scenario simulation analysis of the effects of foreign exchange hedging since 2003. Assume that various tools are not used for foreign exchange hedging operations, calculate the corresponding growth of the base currency, and then calculate the amount of money supply M2 of the year according to the currency multiplier of the year (assuming that the monetary environment remains the same). Continue to assume that the economic aggregate and the transmission effect of monetary policy remain the same, then the change in the money supply is reflected in the growth of the inflation rate, so that the current year's inflation rate can be calculated virtually. The conclusions drawn from the above methods indicate that hedging operations effectively controlled the growth of the base currency and created a relatively good monetary environment for stable economic growth.

Hedge Monetary Policy

Judging from the selection of tools for hedging monetary policy operations, they can be roughly divided into quantitative tools and price tools. Quantitative instruments mainly include open market operations and deposit reserve ratios, and price instruments mainly include interest rate policies and exchange rate policies. Various monetary policy instruments have different characteristics. From the perspective of open market operations, China has gradually formed a quantitative target. At the same time, the operation target system that takes into account the interest rate, and the excess reserve of the banking system as the main operation object, the main operation purpose is to maintain the total liquidity of the banking system at a relatively reasonable level to promote the realization of the goal of monetary credit control. At the same time, the open market operation also guides and adjusts market expectations through changes in operating interest rates in accordance with changes in the market environment and regulatory needs, affecting the trend of market interest rates. From the perspective of deposit reserve ratio, like many emerging market economies facing a large inflow of foreign exchange, in recent years China has also begun to frequently use reserve ratio tools to hedge the liquidity of the banking system. The use of reserve tools for foreign exchange hedging operations has played a significant role in controlling the excessive growth of the money supply and curbing inflation. Although the deposit reserve and central ticket issuance have similar roles in recovering and freezing the liquidity of the banking system, the former is more proactive and effective, the cost is relatively low and there is no "maturity" period, and there is no withdrawal of the currency into the market The problem. The ratio of the hedge ratio of the reserve rate instrument to the total hedge volume is on the rise and has become the most important hedging instrument. From the perspective of interest rate policy, in recent years, the People's Bank of China has strengthened the use of interest rate tools, the interest rate regulation method has become more flexible, and the regulation mechanism has become increasingly perfect. As an important economic lever, interest rates are playing a more important role in the national macro-control system. From the perspective of exchange rate policies, on July 21, 2005, the People's Bank of China officially implemented a managed floating exchange rate system based on market supply and demand and adjusted with reference to a basket of currencies. After nearly 6 years of practice, the external imbalance in exchange rate adjustment and the role of macroeconomics may have become prominent.

Although quantitative tools and price tools have their own advantages, they also have their own disadvantages. As the international balance of payments maintained a double surplus, foreign exchange accounts continued to grow, and the money supply continued to expand, leading to the passive nature of quantitative instruments. If monetary policy is aimed at stabilizing the exchange rate, it is difficult to actively control the money supply. The imbalance in international payments must be corrected through the cost of domestic economic fluctuations or inflation. It is difficult for quantitative instruments to actively change this situation. For price-type instruments, the current low degree of marketization of micro-main bodies is still the main constraint on price-type instruments. Although China has made great progress in the marketization of interest rates, there are still provisions on "lower limit on loan interest rate and upper limit on deposit interest rate management". In this realistic background, the role of interest rate regulation in the macro economy is restricted, and the supply and demand of funds may not be sufficiently sensitive to interest rates. For the fund supplier, the majority of depositors in China lack channels for diversified financial investment, and often use commercial banks as a "safe" for capital, and are not very sensitive to interest rates. For the fund demand side, quantitative types such as credit scale (even (Administrative) regulatory measures often make it difficult for enterprises and other micro-subjects to truly reflect the actual funding needs. In addition, various parties' games have affected the implementation space of price-based instruments. In theory, a more flexible exchange rate system can help curb inflation and asset bubbles. For example, when inflationary pressures are high and the local currency appreciates moderately, imports are relatively cheaper. Especially in China, which lacks resources and needs to import a large number of primary commodities, exchange rate adjustments will help alleviate "import" inflationary pressures. However, in real life, when the prices of international commodities are high, it is often the time when the cost of general export companies' transportation and other items has risen sharply. At this time, if the domestic exchange rate is greatly increased, it is likely to encounter greater resistance in politics (interest groups). This may be the institutional reason why it is difficult for exchange rate policy to play a full role in dealing with the reality of inflation, especially imported inflation.

Hedging monetary policy

The first is to study and improve the intermediate goals of monetary policy. In order to better achieve the ultimate goal of monetary policy, it is often necessary to set an intermediate variable. The central bank adjusts and influences the intermediate variable to achieve the purpose of indirectly achieving the ultimate goal of monetary policy. Generally speaking, the intermediate goals of monetary policy must meet the following three criteria: measurability, controllability, and relevance to the ultimate goal. As far as the reality is concerned, for a long period of time, the key monitoring and analysis indicators of monetary policy and the intermediate targets of regulation and control have been M2 and new RMB loans. In recent years, due to the changes in the economic and financial situation, the rapid development of direct financing, the role of non-bank financial institutions has significantly increased, the off-balance-sheet business of commercial banks has increased significantly, the controllability and measurability of money supply and new RMB loans, and the national There are some problems with the relevance of the economy, and financial regulation and control are facing new circumstances and requirements. It is urgent to determine more appropriate statistical monitoring indicators and intermediate targets for macroeconomic regulation and control. In this context, the People's Bank of China announced the total amount of social financing for the first time in the first quarter of 2011. This is an exploration and innovation that is suitable for changes in China's financing structure and in line with the market-oriented direction of financial macro-control. Empirical analysis shows that compared with newly-increased RMB loans, the scale of social financing is more closely related to major economic indicators. With the development of financial markets and the deepening of financial innovation, the central bank began to expand the scope of monetary and credit investigations during policy analysis, focusing on the entire society rather than just the total credit of the banking system. This can effectively serve monetary policy decisions and Need for macroeconomic regulation.

The second is to flexibly use various monetary policy tools, including open market operations. Flexibility is a prominent feature that distinguishes open market operations from other monetary policy instruments. By flexibly carrying out open market operations, the central bank affects the total amount of money and interest rates, and can smooth out the violent fluctuations that may be caused to the financial system liquidity and financial markets due to cyclical or accidental factors. In addition, various methods should be used to expand the use of reserve tools. Emphasis should be placed on the use of re-loans and rediscounts to promote credit structure adjustment, strengthen window guidance and credit policy guidance, and give full play to the role of interest rate leverage and the role of exchange rates in macroeconomic control. effect. It is worth mentioning that the aggregate and structural problems facing China's economic development cannot be solved by monetary policy alone, and they need to coordinate with other policies to achieve structural adjustment and optimization. It is necessary to continue to adjust the distribution pattern of national income, broaden the channels and fields for private capital investment, accelerate the development of the private economy and the service industry, rationalize the resource price formation mechanism, and improve economic efficiency and endogenous growth momentum.

The third is to continuously innovate monetary policy tools. After the international financial crisis, establishing and strengthening a macro-prudential policy framework has become one of the core contents of summing up the lessons of the financial crisis and improving the financial management system. The "Twelfth Five-Year Plan" proposal clearly requires "the construction of a counter-cyclical financial macro-prudential management system framework." The People's Bank of China combined the macro-prudential concept with the needs of liquidity management to further standardize and clarify the differential reserve system, introduce a dynamic adjustment mechanism for differential reserves to financial institutions, and use it as a supporting and incentive tool. . The dynamic adjustment of differential reserves is based on the total amount of social financing, the degree of deviation of bank credit placement from the main socio-economic development goals, and the impact of specific financial institutions on the overall deviation, taking into account the systemic importance of financial institutions and the sound status of each institution and the country Factors such as credit policy conditions, and more targeted recovery of excessive liquidity, leading financial institutions to provide reasonable, appropriate and stable credit, and optimize the credit structure.

The fourth is to promote the evolution of monetary policy regulation from quantitative to price. With the continuous advancement of financial innovation and financial electronicization, the instability of the currency circulation speed and the instability of the demand for money caused by it are the main reasons for the shift in monetary policy from quantitative tools to price tools in major western countries in recent years. One. The correlation between monetary aggregates, prices, and output has also gradually weakened. In the future, with the continuous improvement of China's market economy system, the ability of commercial banks to independently set prices will continue to increase, and the sensitivity of micro-subjects to prices will continue to increase. At the same time, the market foundation for indirect regulation will continue to improve, and the breadth and depth of the currency market will continue to develop. Consistent with the above-mentioned developments, the quantitative control measures should be actively transformed into price-based measures. To this end, we must unswervingly promote the marketization of interest rates, give play to the important role of price tools in macroeconomic regulation, and comprehensively use tools such as interest rates and exchange rates to improve the effectiveness of monetary policy.

Fifth, steadily push the RMB out. RMB settlement of cross-border trade and RMB going out can promote the reform of the RMB exchange rate formation mechanism, promote the reform of the RMB exchange rate formation mechanism, enhance the initiative and effectiveness of monetary policy, and ease inflationary pressures. In the future, the cross-border use of RMB should be further promoted, allowing foreign (domestic) institutions to use RMB to trade (and invest) domestically (overseas), and establish a smooth inflow and return channels for RMB funds. At this stage, cross-border RMB business should adhere to the principle of serving the real economy, and proceed in accordance with the principles of sound order, controllable risks. The business focus should be on current projects and cross-border direct investment, emphasizing the verification of trade authenticity and preventing short-term arbitrage Mass flow of funds.