Expert: Fundamentals support in the foreign exchange market is expected to strengthen, with the recent sustained decline in the RMB exchange rate. Demand | US dollar exchange rate | Fundamentals
Driven by a combination of internal and external factors, the RMB/USD exchange rate has recently continued to fluctuate, attracting market attention. On June 28th, the onshore renminbi fell below 7.25 against the US dollar during trading, while the offshore renminbi briefly fell to 7.2692, both reaching new lows since November 2022. How to view the recent trend of the RMB exchange rate? Will the RMB exchange rate weaken for a long time?
"The rapid changes in China's foreign exchange market are influenced by comprehensive domestic and foreign factors. Clarifying the reasons for depreciation helps to better analyze and judge the direction and trend of RMB exchange rate changes in the future," said Lian Ping, Chief Economist and Dean of the Research Institute at Zhixin Investment.
In Lian Ping's view, the temporary rebound of the US dollar index is the direct reason for the depreciation of the RMB exchange rate. The supply and demand relationship of foreign exchange is an important market factor for the periodic fluctuations of the RMB exchange rate. Since the beginning of this year, the willingness of business entities to purchase foreign exchange has significantly increased, and the demand differentiation between foreign exchange purchase and settlement has widened. In the first quarter, the service trade deficit was the largest quarterly deficit since 2020. Driven by the demand for foreign exchange mainly through trade in services, residents and enterprises have seen faster growth in their demand for foreign exchange, thereby supporting the strengthening of the US dollar exchange rate. In addition, since the second quarter, the domestic economy has been operating weaker than expected, facing a decrease in support for the RMB exchange rate and increased pressure from interest rate cuts to devalue the RMB.
According to Zhou Maohua, a macro researcher at the Financial Markets Department of Everbright Bank, recent statements from Federal Reserve officials have been biased towards an "eagle" stance, stimulating market expectations for another interest rate hike by the Federal Reserve in July, driving the strength of the US dollar index and causing disturbance to the short-term trend of the RMB exchange rate. "The divergence of monetary policies between China and the United States has led to a high interest rate spread, making it difficult to avoid short-term pressure on the RMB exchange rate," said Pang Ming, Chief Economist and Director of Research at JLL Greater China.
According to relevant calculations, since the beginning of this year, the onshore RMB has depreciated by nearly 5% against the US dollar, while the offshore RMB has fallen by about 4.8% against the US dollar. Experts believe that the RMB exchange rate will not exhibit a linear unilateral trend in the future. After short-term external disturbances, the trend of the RMB exchange rate will eventually return to economic fundamentals.
From an external perspective, although some factors may drive the US dollar index to continue strengthening in the short term, it may be difficult for the US dollar exchange rate to continue to appreciate in the second half of the year. "From a medium to long-term perspective, the US dollar index may weaken as the US economy gradually comes under pressure and the Federal Reserve's tightening policy approaches its end. At the same time, China is expected to launch a policy" combination punch "and drive economic fundamentals to bottom out and rebound, thereby supporting the stabilization of the RMB exchange rate and even returning to the appreciation channel." said Ming Ming, Chief Economist of CITIC Securities.
From an internal perspective, the fundamental recovery trend in China remains unchanged. "With the increasing adjustment of various policies such as monetary and fiscal policies, further consolidating the positive momentum of China's economic recovery, the fundamental support for the RMB exchange rate is expected to gradually strengthen, and China's foreign exchange market will continue to maintain stable operation," said Pang Ming.
Lian Ping believes that the international balance of payments surplus will continue to play a positive role in stabilizing the RMB exchange rate, and the internationalization of the RMB will also increase the demand for the RMB in the international market. In addition, it is expected that relevant departments will continue to improve the exchange rate management system, and if necessary, timely market expectation management will be carried out to avoid irrational depreciation of the RMB exchange rate.
The first meeting of the China Foreign Exchange Market Guidance Committee held on May 18, 2023, emphasized that in the next stage, the People's Bank of China and the State Administration of Foreign Exchange will strengthen supervision, management, monitoring and analysis, strengthen expected guidance, and if necessary, correct cyclical and unilateral behavior to curb speculation and speculation. The second quarter meeting of the Monetary Policy Committee of the People's Bank of China held on June 28, 2023, also pointed out that deepening the market-oriented reform of the exchange rate, guiding enterprises and financial institutions to adhere to the concept of "risk neutrality", comprehensively implement policies, stabilize expectations, resolutely prevent the risk of large fluctuations in the exchange rate, and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.
The continuous correction of the renminbi has not triggered any temporary capital outflow pressure. The Shanghai headquarters of the People's Bank of China recently released a May briefing on the interbank bond market for overseas institutional investment, which showed that as of the end of May, overseas institutions held 3.19 trillion yuan in interbank market bonds. This also means that in May, overseas institutions increased their holdings of China's interbank market bonds by about 20 billion yuan, marking the first increase since March this year.
Experts believe that currently, China's macroeconomic situation, international balance of payments, and foreign exchange reserves are stable, and the overall expectations of financial institutions, enterprises, and residents for exchange rates are stable, which is a solid foundation and strong guarantee for the smooth operation of the foreign exchange market. At the same time, the breadth and depth of China's foreign exchange market are expanding day by day, and it has the ability to achieve independent balance. The RMB exchange rate also has corrective forces and mechanisms, which can maintain basic stability at a reasonable equilibrium level.
"In the future, with the coordinated efforts of macroeconomic policies, China's economy will continue to rebound and improve, further enhancing its support for the foreign exchange market. The tightening cycle of monetary policies in major developed economies is nearing its end, and the strengthening of the US dollar is difficult to sustain. The impact of spillovers will gradually weaken. At the same time, China's foreign exchange market has shown new characteristics of increased resilience, and its ability to adapt to external environmental changes has significantly improved. Cross border capital flows in China are expected to continue to remain stable and orderly," said Wang Chunying, Deputy Director of the State Administration of Foreign Exchange.
