Economic Daily Review: The long-term factors that determine exchange rates have not changed, and many factors have led to the weakening of the renminbi. China | Growth | Economic Daily

Since the first quarter of this year, China's economy has accelerated its recovery from the epidemic, with the Federal Reserve continuously raising interest rates, global liquidity tightening, slowing trade growth, and many factors leading to the weakening of the renminbi. As of June 30th, the central parity rate of the Chinese yuan was 7.2258, setting a new low for the Chinese yuan against the US dollar for the year. However, the CFETS of the RMB exchange rate index on June 30th was 96.74, a decrease of only 3.12% compared to 99.86 on February 3rd, which is within a reasonable range of fluctuations. It is not difficult to see that the depreciation of the RMB this time is largely caused by the appreciation of the US dollar itself, and the rise of the US dollar index has amplified the depreciation of the RMB.

There are three main factors contributing to the recent appreciation of the US dollar. One is that higher interest rates support the appreciation of the US dollar. High interest rates guide short-term international capital to continuously flow towards US dollar assets, driving the US dollar index up all the way. The reversal of the interest rate spread between the Chinese yuan and the US dollar has become a key factor in the depreciation of the Chinese yuan against the US dollar. The second is that market expectations have strengthened the appreciation of the US dollar. Some institutions, enterprises, and individuals are bullish in the offshore market to accelerate the self realization of the appreciation of the US dollar. Thirdly, fundamental improvements support the appreciation of the US dollar. The Federal Reserve's firm interest rate hikes have led to a reduction in bank credit and a decrease in prices. The US Department of Commerce has raised the revised real GDP for the first quarter of 2023 by 0.7 percentage points, supporting the continued strength of the US dollar. In addition, the Russia-Ukraine conflict caused the price of energy, food and other commodities to rise, increasing the export income of the United States.

Meanwhile, in the long run, the fundamental factors supporting the appreciation of the renminbi have not changed. Firstly, there is higher economic growth. This year, China has entered the ranks of innovative countries, with high-quality and incremental economic development. In the first quarter, it achieved a growth rate of 4.5%. With active fiscal and monetary policies, it is expected to achieve higher economic growth in the second quarter, laying a solid foundation for achieving a growth rate of around 5% for the whole year. China's economic growth is significantly faster than that of major economies, providing strong support for the strong value of the renminbi.

Next is high-level openness. After signing the RCEP, China actively applies to join the CPTPP and DEPA agreements, actively connects with trade and investment agreements with higher standards and rules, further promotes trade and investment facilitation, and expands the advantages of the digital economy and digital trade. Driven by external investment, from January to April, 17 Arab countries achieved positive growth in bilateral trade with China, with 9 countries increasing by over 15%. With the further optimization of trade structure, China has become the largest exporter of automobiles, consolidating its position as a major trading country and a strong country.

Once again, it is the basic balance of international payments. In the first quarter of this year, China's capital and financial account deficit was 76.3 billion US dollars, with a reserve asset stock of 3.4 trillion US dollars, ranking first in the world in scale. This means that China's overall foreign exchange supply exceeds demand, and there is fundamentally no market basis for sustained depreciation of the RMB exchange rate.

In addition, the orderly promotion of RMB internationalization is also an important influencing factor. Currently, the renminbi, the most stable currency in the SDR basket, has become an international payment currency for many countries. In March of this year, the proportion of RMB in China's bank's foreign related transactions increased to 48%, marking the first time that RMB has surpassed USD in cross-border transactions in China. With more business entities using RMB for settlement, the quantity and structure of foreign exchange market supply and demand are further changing, and the adverse impact of exchange rate risk on the real economy is decreasing. China's ability to withstand RMB exchange rate fluctuations will be further enhanced.

The determining factors of the RMB exchange rate are very complex, including both long-term and fundamental factors, as well as short-term and critical factors. From the economic performance in the first half of the year, the fundamental factors that determine the long-term trend of the RMB exchange rate have not changed, but some short-term and key factors have affected market expectations, causing the RMB exchange rate to overshoot. The RMB exchange rate is expected to gradually stabilize. With the calming of market sentiment and the return of rationality, the RMB exchange rate will soon shift towards the long-term equilibrium level determined by economic fundamentals, entering a period of fluctuating appreciation and upward trend.

Based on this, it is necessary to objectively and calmly view the two-way fluctuations of the RMB exchange rate, grasp the main contradictions and the main aspects that determine the changes in the RMB exchange rate. Business entities should enhance their adaptability to the expansion of RMB exchange rate elasticity and two-way fluctuations, strengthen foreign exchange risk management, adhere to the principle of exchange rate risk neutrality, and hedge based on actual needs. They should not take chances, speculate on the trend of RMB exchange rate, engage in gambling and speculation, and avoid exchange rate risks and unnecessary losses caused by irrational speculation. The central bank should pay close attention to the spillover effects of monetary policy in the United States, use digital technology to monitor cross-border flows of short-term capital, stock markets, and bonds, and improve market communication mechanisms and expected guidance mechanisms for the RMB exchange rate. Especially to meet the needs of the internationalization of the RMB, we need to vigorously develop the offshore market of the RMB, broaden the depth and breadth of the offshore market, optimize the allocation of RMB resources from both domestic and foreign markets, and form a stronger and more reasonable offshore onshore linkage of the RMB exchange rate.