On April 25, the People's Bank of China's website announced: In order to enhance the ability of financial institutions to utilize foreign exchange funds, the People's Bank of China has decided to reduce the foreign exchange reserve requirement ratio for financial institutions by 1 percentage point starting from May 15, 2022, that is, the foreign exchange reserve requirement ratio will be reduced from the current 9% to 8%.

The foreign exchange reserve requirement ratio refers to the ratio of foreign exchange reserves deposited by financial institutions with the central bank to their absorbed foreign exchange deposits. As of the end of the first quarter of 2022, the balance of foreign exchange deposits within the territory by enterprises and other market entities was $727.7 billion. A 1 percentage point reduction in the foreign exchange reserve requirement ratio will release $7.277 billion to financial institutions.

Reducing the foreign exchange reserve requirement ratio to 8% has a direct effect on commercial banks supporting import enterprises to import goods and supporting enterprises to go global for investment. At the same time, it also plays a role in promoting the balance of import and export goods trade. Of course, it is good news for import and export foreign trade enterprises.

It has some effect on stabilizing the renminbi exchange rate. On the evening of April 25, the offshore renminbi exchange rate against the US dollar once broke through the 6.60 threshold. As of 20:20, it fell to the lowest of 6.6089 yuan, reaching a new low since mid-November 2020. According to statistics, since April 19, the offshore renminbi has depreciated by up to 2300 basis points compared to the closing price on April 18, with an amplitude of 3.6%. The depreciation amplitude is relatively large and rare in recent years. In addition, the onshore renminbi exchange rate against the US dollar closed at 16:30 on the 25th at 6.5544 yuan, depreciating by 669 basis points compared to the previous closing price; entering the night trading session, the onshore renminbi exchange rate once fell below 6.57 yuan, to 6.5775 yuan, continuing to reach a new low since April 2021.

On April 26, the onshore renminbi exchange rate against the US dollar once rose to 6.5263, rising by more than 300 basis points compared to Monday's closing price. However, at the time of writing (around 5:20 PM), it fell back to 6.5474. It is enough to see that the bearish strength of the renminbi exchange rate is huge.

The moderate devaluation of the renminbi exchange rate will bring substantial benefits to export enterprises, which is not a bad thing. However, if it depreciates rapidly or forms an irreversible trend, the central bank needs to intervene appropriately. Reducing the foreign exchange reserve requirement ratio is one of the tools.

The basic logic is that after the central bank reduces the foreign exchange reserve requirement ratio, the frozen foreign exchange is reduced, and the commercial banks' use of foreign exchange quotas is increased, thereby transmitting to the market's sufficient foreign exchange liquidity, reducing the scarcity of foreign exchange, and directly manifesting in the convenience and sufficiency of enterprises and individuals to exchange renminbi for foreign exchange. After the exchange, the renminbi returns to the commercial banks' cages, and then returns to the central bank, to a certain extent, playing a role in stabilizing the renminbi exchange rate! This is the reason why the onshore and offshore renminbi exchange rates both rose after the news of reducing the foreign exchange reserve requirement ratio was released.

The impact of reducing the foreign exchange reserve requirement ratio on the stock market is neutral. The impact of reducing the foreign exchange reserve requirement ratio on the flow of funds is conducive to the reclamation of funds. And the stability of the renminbi exchange rate is also conducive to the stability of the stock market. Therefore, the stock market response on Tuesday (April 26) was a bit more cautious. As of the close on April 26, the Shanghai Composite Index fell by 1.44%, reporting 2886.43 points; the STAR 50 Index fell by 1.84%, reporting 868.07 points; the Shenzhen Component Index fell by 1.66%, reporting 10206.64 points; the ChiNext Index fell by 0.85%, reporting 2150.51 points. Wind statistics show that 748 stocks in the two cities rose, 3966 stocks fell, and 64 stocks were flat.

The impact of reducing the foreign exchange reserve requirement ratio on the stock market has been basically digested. Looking at the trends of the stock and foreign exchange markets on Tuesday, macroeconomic regulatory measures still need to continue to exert force, and the strength cannot be too small. Otherwise, it is difficult to stop the market's inertial decline.In response to this, investors need not panic excessively. Avoid bottom-fishing, selling at a loss, or chasing gains. The best course of action is to remain calm and observe the situation!