How does the wave of foreign exchange settlement affect domestic liquidity?

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Since 2025, companies’ willingness to settle foreign exchange has risen significantly, banks’ foreign exchange settlement and sale surplus has widened rapidly, and climbed to a historical high at the end of the year. Is foreign exchange settlement actually “injecting liquidity,” or “withdrawing liquidity”? Will the central bank have to ease policy passively?

Guohai Securities’ latest fixed income review provides the following core judgments:

First, the surge in foreign exchange settlement does not “inject liquidity” into the banking system. On the contrary, it temporarily squeezes liquidity by consuming excess reserves;

Second, under the current policy framework, the central bank will not passively hedge settlement pressure through foreign exchange positions, and the foreign exchange channel is no longer the main tool for liquidity injection;

Third, even if foreign exchange settlement remains high, its impact on liquidity is still generally controllable. Whether it triggers a reserve requirement ratio or interest rate cut depends mainly on domestic economic and financial conditions, not settlement itself.

Guohai Securities believes this means the wave of foreign exchange settlement is more like a manageable structural disturbance, rather than a signal of monetary policy shift, and its impact on the bond market should not be overstated.

FX Settlement “Lifts M1” But Consumes Bank Excess Reserves

Guohai Securities points out that in 2025, as the RMB continues to strengthen, companies’ willingness to settle foreign exchange has increased notably, banks’ FX settlement and sale volumes surged, and the year-end surplus once rose to a historic high of about 100 billion yuan.

From the perspective of monetary statistics, FX settlement does have some “money creation” effect. Guohai explains that after enterprises sell foreign currency to banks and exchange it for RMB, their RMB deposits increase and are counted into M1. Therefore, a surge in FX settlement objectively pushes up M1 readings.

But from the banking system’s liquidity standpoint, the conclusion is quite the opposite. Guohai’s estimates show that the RMB paid by commercial banks to buy foreign currency comes directly from their excess reserves, and this process consumes the banks’ reserves on a one-to-one basis.

Data shows that in 2025, the banking system’s excess reserve ratio was generally below the average of previous years, at only about 1.6% in December. Guohai believes this shows that FX settlement has already caused temporary liquidity pressure between banks. Meanwhile, forward net FX settlement positions remain high, meaning excess reserves may continue to be consumed for some time.

High Settlement ≠ Return of FX Positioning, Central Bank Won’t Passively Inject Liquidity

In response to market concerns about whether the central bank will hedge settlement pressure using FX positioning, Guohai gives a clear negative judgment.

The report states that before the 2015 exchange rate reform, the central bank’s FX position was highly synchronized with bank FX settlement and played a major role in monetary base injection. But since the reform, especially since 2017, this mechanism has been significantly weakened.

Guohai has found that in recent years, monthly FX position fluctuations of the central bank have consistently stayed within the hundreds of billions yuan range. Even during periods when FX settlement surplus expanded significantly (such as 2020–2021, 2025), FX positions did not increase accordingly, and in 2025 actually posted a slight net decrease overall.

Guohai further points out that the few notable fluctuations in FX positions after 2017 had clear, stage- and signal-based purposes, mainly to smooth excessive exchange rate volatility rather than provide liquidity to the banking system. This means the central bank will not “backstop” bank excess reserves via the FX settlement channel.

Settlement Impact Still Controllable, Banks and Central Bank Have Formed Buffers

Although FX settlement consumes excess reserves, Guohai notes that overall recent funding conditions have not tightened distinctly.

Taking December 2025 as an example, Guohai’s estimates show that monthly FX settlement surplus soared, but DR001 once broke below 1.3%, and net bank system lending stayed above 5 trillion yuan, markedly higher than seasonal levels.

Guohai believes this is mainly due to two factors:

First, the central bank has hedged moderately via open market operations, with cumulative net liquidity injection of about 300 billion yuan in the mid-December period, sending a signal of policy support for the funding market;

Second, the banking system internally adjusted to alleviate the pressure, including temporary redemption of wealth management products and transferring assets back on balance sheet to replenish reserves, thus weakening the impact of FX settlement on funding rates.

It is notable that Guohai especially emphasizes the central bank’s absolute injection scale is not high, which indirectly shows that, relative to overall liquidity management, the current FX settlement scale remains controllable for banks.

Review: Last FX Settlement Surge Did Not Force Easing

In judging future policy trends, Guohai reviews the last upcycle from the second half of 2020 to early 2022, when the RMB appreciated and FX settlement surged.

The report notes that during that period of appreciation and surging FX settlement surplus, the central bank’s FX position remained stable, open market operations were not significantly amplified, and funding rates operated stably overall.

Guohai believes this shows that the liquidity drain from FX settlement has not historically been a binding constraint for monetary easing. The two RRR cuts at that time were more for growth stabilization and support for the real economy rather than direct response to FX settlement.

This experience aligns with recent central bank policy statements—in its decision-making, the exchange rate is no longer the dominant variable, and monetary policy focuses more on domestic economic and financial conditions.

In summary, Guohai Securities judges that even if FX settlement continues to surge, the central bank will stick to a “domestically oriented” monetary policy framework and manage liquidity flexibly and precisely via open market operations. Whether to implement RRR or interest rate cuts or broad easing tools will mainly depend on domestic conditions, not settlement itself. For the bond market, the FX settlement wave is more of a structural disturbance than the prelude to trend easing.

Risk Warning and DisclaimerThe market involves risks; invest with caution. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. You should consider whether any opinions, views, or conclusions in this article suit your circumstances. Investment decisions made accordingly are at your own risk.

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