Where will it go?, RMB approaching 7.2 depreciation | offshore | RMB

On the morning of June 21st, the offshore renminbi fell below the 7.2 level against the US dollar, marking the first time since November last year. As of the close of last week Beijing time, the US dollar/RMB was at 7.1799, the US dollar/offshore RMB was at 7.2156, and the US dollar index was at 102.512.

First Financial has previously reported multiple times that the high interest rate spread between China and the United States, weak willingness of exporters to settle foreign exchange, and dividend payments from overseas Chinese listed companies have all led to high seasonal pressure on the renminbi. In addition, although the Federal Reserve suspended interest rate hikes in June, most institutions expect an additional 1-2 rate hikes starting in July.

It is worth mentioning that in the past two months, during the process of the cumulative depreciation of the RMB by nearly 4000 points, the central bank has not spoken out or intervened, and the regulatory authorities appear quite calm. However, the People's Bank of China announced on the 19th that the six month RMB central bank bills will be tendered on June 26th and settled on the 28th. Traders generally told reporters that the central bank note itself is a stable signal, but more importantly, it depends on improving the yield curve of Hong Kong RMB bonds, maintaining the continuity of issuance, and supporting the development of offshore RMB business.

The RMB faces seasonal pressure

"I haven't seen any obvious signs of intervention recently, it's just market-oriented depreciation," a trader from a foreign bank told reporters. "The exposure to overseas carry trades is high, and exporters don't choose to settle foreign exchange when it's not necessary. Coupled with the pressure of dividends, the RMB generally faces relatively high seasonal pressure in the second and third quarters." He also said that before and after the Spring Festival this year, the RMB appreciated significantly, which was also due to the concentration of foreign exchange settlement by exporters. ".

Barclays foreign exchange and macro strategist Zhang Meng told reporters that the latest forecasts for the US dollar/RMB are 7.2, 7, 6.9, and 6.8, respectively. In the future, the timing and intensity of China's policy relaxation measures may determine the performance of the exchange rate.

Coincidentally, Goldman Sachs has recently adjusted its forecast for the US dollar/RMB exchange rate for the next three months from 7.16 to 7.2, but it is expected to be at 6.9 in 12 months.

In addition to seasonal depreciation pressure, changes in economic fundamentals have also affected the sentiment of the foreign exchange market. Recently, due to weak high-frequency data and weak external demand, many institutions have begun to adjust China's GDP forecasts, but they are generally still higher than the official targets set by China. As early as the first quarter, due to high market expectations for economic recovery, coupled with economic data driven by base effects, many international institutions adjusted China's GDP forecast for 2023 to over 6%.

Last weekend, Goldman Sachs lowered its 2023 GDP forecast for China from 6% to 5.4%; UBS announced on Tuesday that it will lower its GDP forecast for 2023 to 5.2%; Nomura announced last week that it will lower its GDP forecast for 2023 from 5.3% to 5.1% and its forecast for 2024 from 4.2% to 3.9%; Barclays predicts a GDP of 5.2% for 2023.

"We believe that the year-on-year growth rate of GDP in the second quarter may slow down to between 1% and 2%, weaker than our previous expectation of 4.5%. With increased policy support, we still expect consumption to further recover moderately in the third quarter, real estate activity may stabilize, and economic growth to accelerate again. However, policy support may be relatively moderate, driving the economy to rebound slightly to 4% to 4.5% in the second half of the year, but it is unlikely to completely offset the impact of the economic weakness in the second quarter. Therefore, we have lowered our GDP growth forecast for 2023 to 5.2%, and our 2024 forecast to 5%."

In her view, the predicted downside risks mainly come from the uncertainty of the real estate market trend and loose policies, as well as the risk of a significant weakening of external demand. The timing, scale, and effectiveness of policy support may also pose certain downward risks.

Nomura China Chief Economist Lu Ting told reporters that the Chinese government is expected to launch a series of supportive measures after last week's interest rate cut. However, due to factors such as boosting confidence and emotions, declining land sales, etc., there is financial pressure and the transmission channels need to be unblocked. Therefore, the effectiveness of relevant measures needs to be observed.

Recent data shows that as the base effect subsides, the year-on-year growth rate of economic data in May has slowed down. The year-on-year growth rate of social consumer goods retail has slowed down to 12.7%, but its absolute level has slightly increased compared to April; Real estate sales have weakened to a year-on-year decrease of 3%, with new construction falling another 27%. However, after seasonal adjustments, real estate sales and new construction area have remained roughly unchanged or slightly increased compared to April, but are still at a weak low level; The year-on-year growth rate of infrastructure investment has accelerated to 8.8%, while the year-on-year growth rate of manufacturing investment has roughly stabilized; In May, exports fell by 7.5% year-on-year, and the momentum of month on month growth also weakened.

Wang Tao believes that if the economic growth momentum further weakens, future policy support may include: further relaxing real estate policies, such as further relaxing restrictions on purchasing houses in second tier cities, lowering down payment requirements for second home loans, increasing funding support for "guaranteed delivery of buildings," and improving financing conditions for developers; Enhance fiscal and quasi fiscal expansion efforts, such as accelerating the issuance of local government special bonds, raising and using a new batch of policy bank special infrastructure investment funds, in order to boost infrastructure investment; The central government can provide temporary credit and financial support to local governments to settle their debts to enterprise suppliers; But the possibility of the central government directly distributing large-scale consumption or income subsidies to residential sectors is very small; Further minor interest rate cuts, increased credit support to support the expansion of quasi fiscal policies, and restructuring or replacing local government financing platform debt with lower cost debt.

Mainstream institutions generally believe that some policy measures may be introduced before the end of July, but significant fiscal policy support and macroeconomic policy shifts may need to wait until the Politburo meeting at the end of July. However, in the face of the high interest rate spread between China and the United States, various sectors do not believe that China has a lot of room for interest rate cuts. What is more crucial is still to boost the confidence of enterprises and consumers.

Exchange rate fluctuations are still market driven

On June 26th, the People's Bank of China will tender and issue the sixth issue of central bank notes for 2023 through the Hong Kong Monetary Authority's Central Settlement System Bond Bidding Platform. The sixth issue of central bank bills has a term of 6 months and is a fixed rate interest bearing bond with principal and interest paid at maturity. The issuance amount is RMB 5 billion, with an interest date of June 28, 2023 and a maturity date of December 27, 2023. The maturity date will be extended if there are holidays.

Some argue that the issuance of central bank bills will absorb the liquidity of offshore RMB and play a role in supporting the exchange rate, emphasizing the importance of expected management and bottom line thinking of the RMB exchange rate. However, more viewpoints believe that this is more about maintaining the continuity of central bank ticket issuance. Compared to last year, the trend of the RMB this year is more market driven, and there are no obvious signs of intervention from the central bank.

Looking back at last year, during the period of RMB depreciation starting from mid April, the central bank had launched several adjustment tools, such as lowering the reserve requirement ratio for foreign exchange deposits by a total of 3 percentage points twice, issuing 9 offshore central bank bills totaling 90 billion yuan, and announcing an increase in the reserve requirement ratio for foreign exchange risk from 0 to 20% on September 26 last year. These policies clearly signaled that the monetary authorities would lower their expectations of RMB depreciation and maintain exchange rate stability. At present, these measures have not been cancelled.

Liu Jie, Macro Strategy Director of Standard Chartered China, previously told First Financial reporters, "Currently, the large interest rate spread between China and the United States is still the main reason for the weak RMB exchange rate. Most offshore hedge funds have accumulated certain short positions and exporters have weak willingness to settle foreign exchange. We expect that the Federal Reserve may not cut interest rates until the end of the year at the earliest, so the significance of central bank intervention in the face of this interest rate spread is not significant. The key depends on whether the Federal Reserve will raise interest rates for the last time in June or suspend it, but regardless, the rate hike is coming to an end."

Pan Gongsheng, Director of the State Administration of Foreign Exchange, said at the Lujiazui Forum in early June, "Looking ahead, the overall operation of the Chinese economy remains stable with an upward trend, while some market institutions predict that the US economy may face a mild recession. At the same time, as the Federal Reserve's interest rate hike cycle approaches its end, the strengthening of the US dollar is difficult to sustain, and the spillover effects are expected to weaken. Overall, China's foreign exchange market is expected to maintain a relatively stable operating state."

"Over the years, we have accumulated a lot of experience in dealing with external shocks, and the macroeconomic prudential policy tools in the foreign exchange market have become more diverse. We have the confidence, conditions, and ability to maintain the stable operation of the foreign exchange market," he said.