General

With the recent significant appreciation of the renminbi exchange rate, and there are views suggesting that the renminbi exchange rate should continue to appreciate in order to cope with the impact of the recent increase in the prices of imported commodities, the renminbi exchange rate has once again become a hot topic in market discussions.

On May 23, Deputy Governor Liu Guoqiang of the People’s Bank of China stated that the People’s Bank of China has perfected a managed floating exchange rate system based on market supply and demand and adjusted with reference to a basket of currencies. This system is suitable for China at present and in the future. Exchange rate system arrangements. The future trend of the RMB exchange rate will continue to depend on market supply and demand and changes in the international financial market, and two-way fluctuations will become the norm. The People's Bank of China will focus on expected guidance, play the role of exchange rate adjustment macroeconomic and automatic balance of payments stabilizer, and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.

In the past two days, high-level supervisors have intensively released signals on the RMB exchange rate. The Financial Committee also emphasized when it held a meeting on May 21 to further promote the market-oriented reform of the exchange rate and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.

Why did the Financial Commission and the Central Bank once again intensively expressed their views on the exchange rate issue? This may be related to the recent rapid appreciation of the renminbi against the US dollar, and there are opinions suggesting that the renminbi exchange rate should be further appreciated in order to cope with the impact of rising prices of imported commodities. However, it should be noted that with the advancement of exchange rate market reforms, the central bank has basically withdrew from normalized interventions in the RMB exchange rate, which means that the central bank’s tolerance to the fluctuations in the RMB exchange rate has increased significantly, and exchange rate changes mainly depend on it. Because of market supply and demand, not the central bank, the argument that the RMB exchange rate should appreciate is not in line with the general direction of exchange rate market-oriented reforms.

A weaker U.S. dollar index drives a stronger yuan

Liu Guoqiang said that since the beginning of this year, the RMB exchange rate has risen and depreciated, floating in both directions, and has remained basically stable at a reasonable and balanced level. At present, my country’s foreign exchange market is autonomously balanced, the RMB exchange rate is determined by the market, and the exchange rate is expected to be stable. The future trend of the RMB exchange rate will continue to depend on market supply and demand and changes in the international financial market, and two-way fluctuations will become the norm.

“The People’s Bank of China has perfected a managed floating exchange rate system based on market supply and demand, adjusted with reference to a basket of currencies. This system is suitable for China’s exchange rate system arrangements at present and in the future. The People’s Bank of China will focus on expected guidance and give full play to The exchange rate regulates the role of an automatic stabilizer for the macro economy and international payments, and maintains the basic stability of the RMB exchange rate at a reasonable and equilibrium level.

Since April, the RMB exchange rate against the US dollar has continued to appreciate. Up to now, the onshore RMB exchange rate against the US dollar has risen above 6.44, reaching about 6.4345, and the cumulative appreciation since April has reached about 2%.

The main reason for the recent appreciation of the RMB against the US dollar is the weakening of the US dollar index. Since April, the dollar index has fallen by about 3% over the same period. In other words, with the weakening of the U.S. dollar index, major non-U.S. currencies have appreciated and strengthened, and the increase in the exchange rate of the renminbi against the U.S. dollar is relatively small compared to the decline in the U.S. dollar index.

The U.S. dollar's mid- to long-term weakness will have a profound impact on China

Since the epidemic, the Federal Reserve has once again implemented an extraordinary easing policy, which has led many analysts to believe that the US dollar will enter a weak cycle in the medium to long term in the future, and as the US dollar weakens, non-US currencies, including the RMB, are expected to strengthen in the medium to long term. , Enter the appreciation channel.

Xie Yaxuan, chief macro analyst at China Merchants Securities, believes that the Fed's easing has promoted the weakening of the US dollar index. From the time dimension, the Fed's loose monetary policy this time has pushed the US dollar into a weak cycle of no less than 9 years.

Another inherent logic behind the weakening of the U.S. dollar is that it can alleviate the debt pressure of the United States itself. As the world’s largest external net debtor country, after the 2008 financial crisis, the United States’ external net debt rose sharply from 2.51 trillion U.S. dollars to nearly 14 trillion U.S. dollars. The current economic recovery under the US fiscal stimulus will worsen its current account and further aggravate the United States. The burden of external debt, and the depreciation of the U.S. dollar helps to alleviate its debt burden. Therefore, many analysts predict that in the medium and long term, the US dollar enters a weak cycle, and the US dollar index is difficult to return to above 95.

Zhou Chengjun, director of the Central Bank’s Institute of Finance, also said recently that in general, the renminbi will continue to appreciate against the U.S. dollar in the medium to long term. This is not only the result of China’s sustained economic growth and the continuous increase in the relative purchasing power of the renminbi, but also one of the consequences of the Federal Reserve’s quantitative easing and continuous expansion of its balance sheet. Moreover, empirical data also shows that most countries that have successfully overcome the middle-income trap have a per capita income of more than US$10,000. , Its currency will continue to appreciate against the U.S. dollar.

The mid-to-long-term weakening of the US dollar will have a profound impact on the global economic and financial situation and cross-border capital flows. Xie Yaxuan said that, unlike the economic and financial environment associated with the overall strong U.S. dollar from 2011 to 2020, the future weak U.S. dollar will have a significant impact on China's economic cycle and monetary policy through six aspects:

The first is economic growth. A weak US dollar has an expansion effect on the global and Chinese economies, and the economy is prone to "hot".

The second is the price level. There is a seesaw effect between the US dollar index and global commodity prices. The dollar is weak and commodity prices are rising. Under the condition of a weak US dollar, we need to be more concerned about inflation risks.

The third is the exchange rate of the renminbi. The US dollar is weak and the renminbi is strong. It is even more necessary to deal with expectations of appreciation.

Fourth is the flow of international capital. The weak US dollar promotes the expansion of global credit. The influx of international capital into China is chasing Chinese assets and pushing up the prices of domestic financial assets.

Fifth, global trade and industrial chain transfer. During the weak dollar period, the scale of international trade expands, trade disputes ease, and global industrial chain trade and industrial transfer will be active again. In the future, special attention should be paid to China's new trends in undertaking industrial transfer from developed countries. Some industries in China cooperate with ASEAN and other relevant countries under the RCEP framework to ensure the security of bulk commodity supply and achieve new opportunities for international industrial transfer brought about by "carbon neutrality".

Beware of the phased rebound of the dollar index

Although the US dollar is likely to enter a weak cycle in the medium and long term, it does not mean that the trend of the US dollar index during this period is a straight decline, and repeated fluctuations or even periodic rises in the middle are possible. For example, from the beginning of the year to the end of March, the U.S. dollar index experienced a period of sustained strength that exceeded expectations. At the same time, since Fed officials have recently begun to discuss reducing the scale of bond purchases, the market expects that the Fed's easing policy will be withdrawn early, which will bring more uncertainty to the short-term trend of the US dollar index.

MATT WELLER, head of global research at Jiasheng Group, said that the minutes of the Fed’s meeting showed that some members believed that the Fed should start discussing the reduction in the size of the Fed’s purchase of financial assets. This is an important event that shows that the Fed’s leadership has begun to have different voices. Against this background, some committee members may be on the rise in concerns about inflation and financial risks. In the second half of this year, the momentum of the US economic recovery will continue to be strong, and inflation will continue to rise, which may force the Fed to withdraw from the ultra-loose policy earlier than it currently plans. The Jackson Hole annual meeting of global central banks in August may be a time to watch, and the Fed may announce a timetable for balance sheet reduction.

Judging from the current market response, some institutions have predicted that the Fed will begin to reduce the scale of asset purchases before the end of this year. This policy will bring greater volatility to the market; there are also views that the reduction of the scale of asset purchases will take place until the end of this year. Early next year. However, the conditions for raising interest rates are still not met, and it may not be until after 2022. But no matter what, the gradual withdrawal of the Fed's easing policy will undoubtedly intensify the volatility of the global financial market.

Therefore, for market entities, the focus is not to bet on the unilateral appreciation of the RMB exchange rate, but to prepare in advance for the ever-increasing fluctuations in the RMB exchange rate, make financial planning, and avoid exchange rate risks.

"If we take the internationalization of the RMB as a strategic goal and promote its international use in accordance with the existing policy framework, support Chinese enterprises in allocating resources, arranging production, and adjusting the division of labor on a global scale, so as to achieve a new dual-cycle development pattern and high-quality development requirements. The exchange rate formation mechanism and the role of RMB relative price signals must have a very clear understanding and top-level design." Zhou Chengjun said, we must admit that under the conditions of RMB internationalization, we cannot control the RMB exchange rate, and the Central Bank of China will eventually abandon the exchange rate. The goal is that the RMB exchange rate is determined by the preferences, expectations and transactions of all market players in the world.

Wang Chunying, deputy director of the State Administration of Foreign Exchange, also said recently that it is very important for companies to establish a risk-neutral concept, rationally face exchange rate fluctuations, prudently arrange the currency structure of assets and liabilities; manage exchange rate risks reasonably to maintain financial stability and sustainability as the orientation , The hero should not be regarded as the profit and loss of hedging. The hedging and hedging is like spending money on insurance, it is a relatively small cost to manage relatively large uncertainties and possible losses.

As for the trend of the RMB exchange rate in the short term, it is expected that it will remain basically stable despite wide fluctuations. In fact, despite the continuous appreciation of the RMB exchange rate since April, the appreciation of the RMB against the US dollar has only been around 1.61% year-to-date.

When talking about RMB exchange rate changes in the past, the market was worried about the impact on my country’s exports. However, Yang Aozheng, chief Chinese analyst at FXTM, said that due to the repeated global epidemic, the manufacturing industry in Southeast Asia and other emerging markets is still far from recovering. At the pre-epidemic level, the advantage of China’s exports is even more obvious, and it is believed that this advantage may not change until the global epidemic enters a stable stage. It is expected that China’s export advantage will continue throughout 2021. Even if the RMB remains stable at the current high of around 6.5, it will not hurt the trend of China’s export growth.