How will the RMB go?, Over 1700 basis points depreciation in half a month Exchange rate | China | basis points
Under pressure
The exchange rate of the Chinese yuan against the US dollar has fallen below 7.3 for the first time this year.
As of 17:00 on the 15th, the spot exchange rate of offshore RMB against the US dollar hit its lowest point at 7.3204 in the foreign exchange market, depreciating by over 1700 basis points in half a month compared to the closing price on July 31st.
How will the RMB move this year? Is it possible to further investigate?
Multiple factors causing pressure on the RMB exchange rate
From the overall trend of this year, the exchange rate of the Chinese yuan against the US dollar has basically fluctuated and declined. Although there was a phase of appreciation in July, it began to fluctuate and decline again in August.
Pang Ming, Chief Economist and Director of Research at Jones Lang LaSalle in Greater China, pointed out in an interview with China News Agency's Guoshi Express that from the evening of August 14th to the morning of August 15th, the offshore and onshore RMB exchange rates against the US dollar both hit new lows since June 30th. This is mainly due to the passive depreciation caused by the rebound and rise of the US dollar index. As the market began to re-examine and worry about the fundamentals of the European and American banking industries, there was an increase in demand for safe haven in the US dollar, driving up the US dollar index.
In addition, on the 15th, the People's Bank of China announced a reduction in the MLF interest rate, which also widened the interest rate gap between China and the United States. Coupled with attention to China's macroeconomic data, it has put temporary and short-term pressure on the RMB exchange rate.
"The recent pressure on the RMB exchange rate is mainly influenced by various factors," said Wang Youxin, a senior researcher at the Bank of China Research Institute, to the China News Agency's Guoshi Express. From an external perspective, the US dollar index has recently rebounded. The slowdown in the decline of core inflation in the United States, coupled with Fitch's downgrade of the US sovereign credit rating and Moody's downgrade of the US small and medium-sized bank rating, has led to increased risk aversion and a significant increase in US bond yields, boosting the US dollar index.
From domestic factors, MLF interest rates and reverse repo rates have been lowered again, widening the interest rate spread between China and the United States. In addition, recently released trade, finance and other data have shown weak performance, with some high debt industries experiencing an increase in liquidity risk, thereby suppressing exchange rate performance.
What will be the direction of the RMB exchange rate this year?
"But we must also see that after the unexpected landing of interest rate cuts and the release of macroeconomic data, the RMB exchange rate rebounded in the early trading session. This indicates that compared to external factors and macroeconomic data, the market is more concerned and yearning for policy increment space, and has improved confidence in the timing, effectiveness, and degree of macroeconomic policies." said Pang Ming.
He further stated that considering that the pace of the Federal Reserve's interest rate hike is nearing completion, China's macroeconomic foundation is solid, strong, and confident. There are many foreign exchange policy toolboxes and tools available, and it is expected that "7.3" will be the lowest point of the renminbi in the third quarter. The subsequent exchange rate trend will continue to be influenced by the US dollar index, the economic performance and policy orientation of other major economies, China's macroeconomic fundamentals, and foreign exchange policies. Although there will still be some fluctuations, the renminbi exchange rate will continue to maintain basic stability at a reasonable equilibrium level.
Wang Youxin believes that the trend of the RMB exchange rate in the second half of the year will show two obvious stages. Short term pressure fluctuations are a direct reflection of changes in domestic and international market conditions. However, the RMB exchange rate has a solid stable foundation. Whether viewed from the perspective of foreign exchange reserve size, relative economic growth at home and abroad, economic growth potential, cross-border capital flow situation, or a sound macroeconomic prudential policy tool system, the RMB exchange rate has the foundation to stabilize and rebound, which has been very evident in the past few rounds of exchange rate fluctuations.
"After short-term fluctuations, it is expected that the RMB exchange rate will gradually enter a stable or even fluctuating recovery stage in the fourth quarter. At that time, with the increasing downward pressure on the European and American economies, the dynamics of domestic and foreign economies will evolve again, and more positive factors favorable to the RMB exchange rate will emerge." Wang Youxin said.
Pang Ming believes that from the perspective of foreign exchange policy, the official statement conveys a clear policy orientation to maintain basic stability of the exchange rate. Considering the recent policy signals such as the reintroduction of countercyclical factors reflected in the central parity rate of the RMB exchange rate, the adjustment of macro prudential parameters for cross-border financing, and the tools retained in the policy toolbox such as the reserve requirement ratio for foreign exchange deposits and the risk reserve ratio for forward foreign exchange sales, it can be said that China has the foundation, strength, and methods to maintain basic stability of the RMB exchange rate, strengthen effective and reasonable guidance of market expectations, adhere to the decisive role of the market in the exchange rate, and enhance the flexibility of the RMB exchange rate.
