How does the sense of people's livelihood feel?, The current round of RMB breaking 7 marks the end of the full month's surplus economy | RMB | People's livelihood

Recently, the issue of the value of the Chinese yuan has attracted much attention.

On May 17th and 18th, both offshore and onshore RMB broke through the integer level of 7.0, falling continuously for nearly a month. It was not until the Federal Reserve suspended interest rate hikes and the US dollar index weakened that the renminbi began to recover against the US dollar on June 15th, but it remained above 7. According to the Foreign Exchange Trading Center, on June 16th, the central parity rate between the Chinese yuan and the US dollar in the interbank foreign exchange market was 7.1289 yuan.

Except for the US dollar, the exchange rates of the euro and pound against the Chinese yuan are all rising, and the pound against the Chinese yuan has reached a new high in nearly two years. On June 16th, the Foreign Exchange Trading Center announced that the central parity rate was 9.1161 yuan per pound.

The exchange rate of the Chinese yuan is far and near from the common people. Because it is not only closely related to macroeconomic operations, but also directly affects enterprise imports and exports, people's consumption and study abroad, etc

How has the recent pressure on the RMB exchange rate formed? What is the "physical sensation" of the common people? Has it been possible to return to the era of "6" recently?

Why did it fall like this?

The central parity rate of the Chinese yuan against the US dollar. Image from the official website of the People's Bank of China

The exchange rate of the Chinese yuan against the US dollar has always been considered an important indicator, breaking 7. In the past five years, the Chinese yuan has "broken 7" three times. Although the Chinese yuan is also one of the five major currencies in the Special Drawing Rights basket, the US dollar remains the strongest one in the basket.

In fact, exchange rate fluctuations are influenced by multiple factors. At present, in the post pandemic era, the world economy is experiencing weak growth, and the domestic economy is recovering well. However, market demand is still insufficient, and some structural problems are prominent. In addition, the impact of the Federal Reserve's policies are all reasons for the pressure on the renminbi exchange rate.

Yang Haiping, a researcher at the Securities and Futures Research Institute of Central University of Finance and Economics, said in an interview with Chao News reporters, "The recent depreciation of the Chinese yuan is mainly affected by the strengthening of the US dollar index and the weakening of market expectations for domestic economic recovery."

In addition, with the rebound of UK economic data in April and factors such as the European Central Bank's interest rate hike, the pound and euro rose sharply against the US dollar. The pound against the US dollar has recently risen to a new high in nearly a year, reaching 1:1.28 on the 17th. These currencies exhibit an inverse correlation with the exchange rates of the US dollar and the Chinese yuan. "The US dollar is depreciating, and those currencies are appreciating; the Chinese yuan is depreciating against the US dollar, and those currencies are inevitably appreciating against the Chinese yuan." Tan Yaling, the director of the China Foreign Exchange Investment Research Institute, explained in an interview with Chao News reporters.

Is the rise, fall, and fall all natural factors in the market? Not entirely. From the perspective of the external environment, in recent years, the global economic and political situation has been full of uncertainty, and some geopolitical instability factors have increased, bringing fluctuations and pressure to the RMB exchange rate. From the perspective of human factors, Tan Yaling reminds that "the recent significant depreciation of the exchange rate may be closely related to speculative speculation. There are constantly speculators in the international community singing down the Chinese yuan, as compared to the US dollar, there are many uncertain factors, and the speculative sentiment is temporarily shifting to new markets."

But she also believes that "such hype itself is decoupled from the Chinese economy. Recently, the World Bank and the International Monetary Fund have raised their expectations for the Chinese economy to around 5.6% and 5.2%, respectively, which is the international community's long-term positive expectation for China." She refers to the latest issue of the "China Economic Briefing" released by the World Bank on June 14th, which pointed out that with the surge in service spending and the rebound in consumer demand, China's GDP is expected to grow by 5.6% in 2023.

Will there be any "trouble" with such a decline? According to interviews with trendy news reporters, experts are generally relatively calm. "It is expected that the RMB exchange rate will maintain a normal two-way fluctuation trend," said Yang Haiping. Articles such as "The RMB Exchange Rate Breaks 7" Worth Attention and No Anxiety "and" The Basic Stable Pattern of RMB Exchange Rate under Short term Pressure Will Not Change "also convey a sense of stability. From the perspective of "national actions", recent policies have indeed not shown obvious guiding and regulatory intentions, indicating that the central bank's policy regulation toolbox reserves are sufficient and there is a sense of "sitting steadily on a fishing platform". Previously, Pan Gongsheng, Vice President of the People's Bank of China and Director of the State Administration of Foreign Exchange, stated at the 14th Lujiazui Forum on the 8th that "the overall operation of China's foreign exchange market is stable, and exchange rate expectations and cross-border capital flows remain relatively stable.".

But the short-term impact is also visible to the naked eye. Zhou Maohua, a macro researcher at the Financial Market Department of Everbright Bank, told Chao News reporters, "The depreciation of the RMB has a 'double-edged' impact on China, which can help boost some enterprises' foreign trade exports, but may also increase import costs for some enterprises, and may cause disturbances to cross-border capital flows."

Tan Yaling believes that "continuous depreciation is not conducive to the stability and recovery of economic confidence." In May, the Purchasing Managers' Index of China's manufacturing industry was 48.8%, running below 50% for two consecutive months, and recent import and export data are not strong. At this time, the depreciation of the RMB will increase the pressure on the recovery of foreign trade imports and exports.

How is the "feeling" of people's livelihood?

The significant increase in exchange rate costs is a deeply felt feeling among all parties in the market during this period. In the short term, the people who are most affected by exchange rate fluctuations are those who spend RMB and earn foreign currency, namely foreign trade enterprises and those who have the need to study and go abroad.

The depreciation of the Chinese yuan can be seen as a short-term advantage for some companies, which is beneficial for foreign exchange earnings. This means that obtaining the same foreign currency can result in more Chinese yuan being exchanged. However, if import companies have to suffer losses, it means that there are fewer imported goods that can be purchased with the same RMB, and the prices of imported goods are relatively higher. This weakens their competitiveness in the domestic market, affecting consumer purchasing willingness and ability, or increasing the production and operating costs of industries and enterprises that rely on imported raw materials, energy, equipment, etc.

Pan Tiannan, the business manager of a pharmaceutical and chemical trading company in Hangzhou, engaged in Southeast Asia and Central and Eastern Europe foreign trade, said in an interview with Chao News that the orders previously received will have a 4-5% increase in revenue in the near future. However, "Recently, we will be very cautious when accepting orders, especially in countries such as India and Vietnam where the entire import market has experienced a severe decline and customer order demand has decreased. Currently, we will be very cautious in calculating prices."

Some companies do not have a strong sense of physical presence. Anshu Industrial Technology Co., Ltd. mainly exports building protective equipment and door hardware accessories to the European and American foreign trade markets. Chen Shengjie, the general manager of the company, told Chao News reporters, "Customers who care about short-term exchange rate fluctuations are generally not major customers." The company signs orders on an annual basis to ensure that prices are not affected by exchange rate fluctuations within this year. "If the exchange rate fluctuated by more than 10% that year, the price would be revised, but such incidents are rare."

And some importers are having a headache. Chen Yi, General Manager of Ningbo Dijia Weida Trading Co., Ltd., told Chao News that the company is greatly affected by foreign exchange fluctuations. "Last Friday, we just made a foreign exchange payment and imported Romanian wine. Due to the soaring prices in Europe, the purchase price of this batch has increased by 15% -20% compared to the previous batch. At the same time, due to exchange rate factors, it has increased by 7%. Overall, the cost price of this batch of goods has increased by nearly 30%."

Foreign trade enterprises that have been fluctuating in the "commercial sea" for a long time have their own "methods" to cope with exchange rate fluctuations, the most typical of which is to lock in the exchange rate and adopt a more secure payment method. For example, prepaid full payment, letter of credit, etc., try to reduce orders of forward collection type as much as possible. The company will also have corresponding policies, such as bank lock up, bill of lading, letter of credit, or doing forfaiting, which is to lock in some profits and avoid risks at the current exchange rate.

Officials from Industrial Bank Hangzhou Branch also introduced to Chao News reporters some services that financial institutions can provide to help enterprises avoid foreign exchange risks, such as providing tiered classification services for exchange rate hedging customers, optimizing exchange rate hedging trading channels, and facilitating enterprise customers to carry out exchange rate hedging business.

How do families who need to exchange RMB for foreign currency to use abroad cope? Ms. Xu, who has a child at home and is about to study abroad in the United States, introduced her method of resisting the depreciation of the exchange rate to Chao News reporters - buying US dollar deposits. This is also a common operation. "At the beginning of this year, I purchased US dollars at an exchange rate of around 6.8. Some of them bought US dollar term deposits, while others were in demand. Currently, the US dollar exchange rate is around 7.1, and in the past six months, I have earned both interest and exchange rate difference." Ms. Xu said that at the end of May, she ran to four major banks and two local banks in one go and bought another US dollar term deposit before the interest rate reached its peak. Recently, the fixed deposit of US dollars has indeed become popular.

Ms. Zhou, a parent of her child studying in the UK, said that after her child goes to the UK for undergraduate studies, exchange rates are a daily concern. Generally speaking, we tend to stock up early at low points. "For example, in September last year, when the pound dropped to around 7.9, we hoarded tens of thousands of yuan." Ms. Zhou also complained that prices in the UK have skyrocketed, and supermarkets in the UK have seen price increases for milk and eggs, and there are often shortages. The purchasing power of the pound has decreased, and the daily expenses for children studying abroad require more yuan.

"There is no basis for sustained depreciation"

When can the RMB stop falling in this round?

The answer is gradually becoming clear - on the 14th local time, the Federal Reserve announced that it will maintain the target range of the federal funds rate at 5% to 5.25%, which is in line with general expectations. After 10 consecutive interest rate hikes, the Federal Reserve finally came to a halt. At 19:00 on June 15th, both domestic and foreign RMB exchange rates hit bottom and rebounded.

Yang Haiping is also very confident in stopping the decline. He believes that "the conclusion that the US interest rate hike is coming to an end should be true, and the market's concerns about the US economic recession are also real. Therefore, a decline in the US dollar index should be a high probability event. Moreover, China will increase its efforts to stabilize the economy, including continuing to implement a stable foreign trade policy, and there is no basis for sustained depreciation of the renminbi."

In fact, on the afternoon of May 18th, after breaking the "7" mark, this meeting was held - the first meeting of the China Foreign Exchange Market Guidance Committee in 2023 was held in Beijing. The meeting pointed out that member units of the self-discipline mechanism should consciously maintain the basic stability of the foreign exchange market and resolutely suppress the fluctuations of exchange rates. At the same time, it is very clear that "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 correction forces and mechanisms, which can maintain basic stability at a reasonable equilibrium level.".

Reasonably balanced and basically stable, with a bottom line in eight words. There is both a determination to marketize the exchange rate and confidence in China's maintenance of RMB exchange rate stability.

In April of this year, the President of the People's Bank of China, Yi Gang, mentioned that in the past five years, the Chinese yuan has "broken 7" against the US dollar three times. The first time was in August 2019, the second time was in February 2020, and the third time was in September last year. The first two times it took 5 months to return to below 7, and last year it took 3 months. How long will it last this time?

"Based on the development of China's economy and the changes in the international economy and society, I predict that the renminbi will stop falling by around the end of the third quarter," said Liu Yulong, associate professor at the School of Accounting at Zhejiang University of Technology, in an interview with Chao News. "At the same time, the process of internationalization of the renminbi is steadily advancing, which will strengthen the international demand for the renminbi. This also means that the renminbi cannot experience a significant and sustained depreciation."

In Tan Yaling's view, the extent and duration of this repair still cannot exclude the interference of the Federal Reserve's interest rate hike. Raising interest rates is just a pause, not an end. Based on the currently disclosed information, it is expected that the Federal Reserve will raise interest rates twice more this year. "The moderation of the appreciation of the US dollar index is relatively strong, and it may not climb again at 104 points. Therefore, for a period of time in the future, the Chinese yuan may still maintain a level of around 7.1."

There is no need to treat "breaking 7" as particularly sensitive data - this is the consensus among experts in interviews. It is widely believed that with the easing of internal and external pressures, the energy storage of previous policies will gradually be released, and the endogenous momentum of the economy will accumulate. The supporting role of the RMB exchange rate will gradually become prominent in the basic face of the economy.

However, the depreciation of the renminbi has indeed raised a wisp of "wolf smoke". It reminds all parties to pay closer attention to the fundamentals of economic operation, take the shortcomings of economic recovery more seriously, face the factors of some economic indicators not meeting expectations, and more effectively release the vitality of the stable growth system.

Chen Shengjie told Chao News reporters that foreign trade business was indeed not optimistic in the first half of this year, and the order volume was not as good as last year. "I haven't seen factory owners asking for orders or renting equipment in WeChat or QQ groups for many years, but a lot of them have emerged this year." Pan Tiannan also said that this year, many upstream basic chemical products have risen in price, and downstream orders are competing at low prices, resulting in many midstream supply chain factories mainly relying on volume and are doing their best to overcome difficulties.

In response to some concerns about the recent weak economic recovery, policies are responding quickly. The central bank's unexpected "interest rate cut" and release of strong signals of countercyclical adjustment, the Ministry of Commerce announced on the 15th that it will promote the introduction of consumption expansion policy measures, the National Development and Reform Commission announced on the 16th that it will work to stabilize the economy in six aspects such as restoring and expanding consumption, and the State Council executive meeting on the 16th will study a series of policy measures to promote sustained economic recovery and improvement... Various positive factors are gradually accumulating, which will form strong support for the stability of the RMB exchange rate.

It is advisable to have a broad view of the scenery. Overall, while the overall trend of China's economic recovery remains unchanged and the macroeconomic fundamentals, international balance of payments, and foreign exchange reserves are good, perhaps we only need to maintain patience with the resilience and elasticity of the renminbi.