Since 2025, the willingness of enterprises to settle foreign exchange has significantly increased, and the bank's foreign exchange settlement and sales surplus has rapidly widened, reaching a historical high by the end of the year. Is the settlement of foreign exchange a &#34;release of water&#34; or a &#34;withdrawal of water&#34;? Will the central bank passively loosen its policy?
Sealand Securities in its latest fixed income commentary provides the following core judgments:
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First, the high increase in foreign exchange settlement is not a &#34;release of water&#34; into the banking system; rather, it will create a temporary squeeze on liquidity by consuming excess reserves;
Second, under the current policy framework, the central bank will not passively hedge the settlement pressure through foreign exchange reserves; the foreign exchange channel is no longer the main tool for injecting liquidity;
Third, even if the settlement remains high, its impact on liquidity is still generally controllable. Whether to trigger a reserve requirement ratio cut or interest rate cut depends primarily on the domestic economic and financial situation, rather than the settlement itself.
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Sealand Securities believes this means that the wave of foreign exchange settlement is more like a manageable structural disturbance rather than a signal of a shift in monetary policy, and its impact on the bond market should not be overestimated.
<h2>High Settlement &#34;Raises M1,&#34; but Consumes Bank Excess Reserves</h2>
Sealand Securities points out that in 2025, under the backdrop of a continuously strengthening RMB exchange rate, the willingness of enterprises to settle foreign exchange has significantly increased, and the scale of bank foreign exchange settlement and sales has rapidly grown, with the surplus reaching about 100 billion yuan at the end of the year, a historical high.
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From the perspective of monetary statistics, foreign exchange settlement does have a certain &#34;money creation&#34; effect. Sealand Securities explains that when enterprises sell foreign exchange to banks and exchange it for RMB, their RMB deposits increase and are counted in M1, thus the high increase in settlement objectively pushes up the M1 reading.
However, from the perspective of bank system liquidity, the conclusion is exactly the opposite. Sealand Securities' calculations show that the RMB paid by commercial banks for purchasing foreign exchange directly comes from their excess reserves, and this process equivalently consumes the reserve level of the banking system.
Data shows that in 2025, the overall excess reserve ratio of the banking system was lower than the average level of previous years, with only about 1.6% in December. Sealand Securities believes this indicates that the settlement behavior has created a temporary squeeze on interbank liquidity. Meanwhile, the forward net settlement position remains high, indicating that excess reserves may continue to face consumption in the coming period.
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<h2>High Settlement ≠ Return of Foreign Exchange Reserves, Central Bank Will Not &#34;Passively Inject&#34;</h2>
In response to market concerns about whether the central bank will hedge settlement pressure through foreign exchange reserves, Sealand Securities provides a clear negative judgment.
The research report points out that before the exchange rate reform in 2015, the central bank's foreign exchange reserves were highly synchronized with bank foreign exchange settlement and sales, playing an important role in the injection of base currency; however, since the exchange rate reform, especially since 2017, this mechanism has been significantly weakened.
Sealand Securities has found that in recent years, the monthly fluctuations of the central bank's foreign exchange reserves have long remained at the level of hundreds of billions, and even during periods of significant surplus in foreign exchange settlement (such as 2020-2021 and 2025), foreign exchange reserves did not show a simultaneous upward trend, with a slight net decrease throughout 2025.
Sealand Securities further pointed out that the few significant changes in foreign exchange reserves after 2017 all had clear phased and signaling purposes, mainly used to smooth excessive fluctuations in the exchange rate, rather than providing liquidity to the banking system. This means that the central bank will not &#34;support&#34; the banks' excess reserves through the settlement channels.
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<h2>The impact of foreign exchange settlement is still controllable, and banks and the central bank have formed a buffer</h2>
Although foreign exchange settlement consumes excess reserves, Sealand Securities noted that the overall liquidity in the recent period has not significantly tightened.
Taking December 2025 as an example, Sealand Securities' calculations show that the surplus in foreign exchange settlement significantly increased that month, but the DR001 once fell below 1.3%, and the net lending scale of the banking system remained above 5 trillion yuan, clearly higher than the seasonal level.
Sealand Securities believes that there are two main reasons behind this:
<blockquote>
First, the central bank conducted moderate hedging through open market operations, with a cumulative net injection of about 300 billion yuan in mid-December, releasing a policy signal to support liquidity;
Second, the banking system responded to pressure through internal adjustments, including phased redemptions of wealth management products and asset reclassification, which weakened the impact of foreign exchange settlement on funding rates.
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It is worth noting that Sealand Securities particularly emphasized that the absolute scale of the central bank's injection is not considered high, which indirectly confirms that the current scale of foreign exchange settlement is still within a controllable range relative to the overall liquidity management positions of banks.
<h2>Review: The previous round of high foreign exchange settlement did not force easing</h2>
In assessing future policy directions, Sealand Securities reviewed the previous round of appreciation and high foreign exchange settlement from the second half of 2020 to early 2022.
The research report pointed out that against the backdrop of exchange rate appreciation and an expanding surplus in foreign exchange settlement, the central bank's foreign exchange reserves also remained stable, and open market operations did not significantly increase, with overall funding rates running smoothly.
Sealand Securities believes that this indicates that the liquidity consumption brought about by foreign exchange settlement has historically not constituted a &#34;hard constraint&#34; for monetary policy easing. The two reserve requirement ratio cuts at that time were more about supporting stable growth and the real economy, rather than directly responding to foreign exchange settlement.
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This experience is also consistent with the recent policy statements from the central bank—within its decision-making framework, the exchange rate is no longer the dominant variable, and monetary policy focuses more on domestic economic and financial conditions.
In summary, Sealand Securities judges that even if foreign exchange settlement continues to increase significantly, the central bank will still adhere to a &#34;self-centered&#34; monetary policy framework, conducting flexible and precise liquidity management through open market operations. Whether to initiate comprehensive easing tools such as reserve requirement ratio cuts or interest rate cuts will still mainly depend on the domestic economic and financial situation, rather than foreign exchange settlement itself
For the bond market, the wave of currency settlement is more of a structural disturbance rather than a prelude to trend-based easing

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Sealand Securities stated that the high increase in foreign exchange settlement is not "injecting water" into the banking system; instead, it will create a temporary squeeze on liquidity by consuming excess reserves. Under the current policy framework, the central bank will not passively hedge the settlement pressure through foreign exchange holdings, and the foreign exchange channel is no longer the main tool for capital injection. Whether to trigger a reserve requirement ratio cut or interest rate cut still depends on the domestic economic and financial situation, rather than the settlement itself

How does the foreign exchange settlement tide affect domestic liquidity?