Where will the RMB approach 7.2?
On the morning of June 21, the offshore RMB fell below the 7.2 mark against the US dollar, which was the first time since November last year. As of the close of last week, Beijing time, USD/RMB was at 7.1799, USD/CNH was at 7.2156, and the U.S. dollar index was at 102.512.
China Business News has reported many times before that the high interest rate differential between China and the United States, exporters’ weak willingness to settle foreign exchange, and overseas Chinese listed companies buying foreign exchange with dividends (concentrated in July and August) have all led to relatively high seasonal pressure on the RMB. In addition, although the Federal Reserve suspended raising interest rates in June, most institutions predict that there may be 1 or 2 interest rate hikes starting in July.
It is worth mentioning that in the past two months, the central bank has not seen any voice or intervention during the cumulative depreciation of the RMB by nearly 4,000 points, and the regulators seem quite calm. However, the People’s Bank of China announced on the 19th that the central bank’s six-month RMB central bank bills will be tendered on June 26 (Monday) and will be delivered on the 28th (Wednesday). Traders generally told reporters that the central bank bill itself is a stable signal, but more is to improve the Hong Kong RMB bond yield curve, maintain the continuity of issuance, and support the development of offshore RMB business.
Yuan under seasonal pressure
“I haven’t seen any obvious signs of intervention in the near future, which is market-oriented depreciation.” A trader at a foreign bank mentioned to reporters, “The exposure to overseas carry trades is relatively high, and exporters will not choose to settle foreign exchange when it is unnecessary. The pressure on dividends generally faces relatively high seasonal pressure on the renminbi in the second and third quarters.” He also said that around the Spring Festival this year, the renminbi appreciated significantly because of the concentration of foreign exchange settlement by exporters.
Barclays foreign exchange and macro strategist Zhang Meng told reporters that the latest forecasts for USD/RMB are 7.2, 7, 6.9, and 6.8 (forecasts from the third quarter of this year). In the future, the timing and strength of China’s policy easing measures may determine the performance of the exchange rate.
Coincidentally, Goldman Sachs recently adjusted its USD/RMB exchange rate forecast for the next three months from 7.16 to 7.2 respectively, but expects the point to be 6.9 after 12 months.
In addition to seasonal depreciation pressure, changes in economic fundamentals have also affected sentiment in 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 China’s official target (5%). As early as the first quarter, due to the high market expectations for economic recovery, the superimposed economic data surged due to the base effect. At that time, many international institutions adjusted China’s GDP forecast in 2023 to more than 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 2023 GDP forecast to 5.2%; Nomura said last week that it will lower its 2023 GDP forecast from 5.3% to 5.1%, and cut the 2024 forecast from 4.2% to 3.9%; Barclays’ GDP forecast for 2023 is 5.2%.
Wang Tao, head of Asian economic research and chief China economist at UBS, told reporters, “We believe that the quarter-on-quarter GDP growth rate in the second quarter may slow to between 1% and 2%, which is weaker than our previous expectation of 4.5%. With more policy support, we still expect consumption to recover moderately in the third quarter, real estate activity may stabilize, and economic growth will accelerate again. However, policy support may be more moderate, driving a moderate rebound in economic growth to 4% in the second half of the year~ 4.5% (month-on-month annualized growth rate), but it is unlikely to fully offset the impact of the weaker economy in the second quarter. Therefore, we have lowered our GDP growth forecast to 5.2% in 2023 and 5% in 2024.”
In her view, the forecast downside risks mainly come from the uncertainty of the real estate market trend and policy easing, as well as the risk of a sharp weakening of external demand. There may also be certain downside risks in the timing, scale and effectiveness of policy support.
Nomura China Chief Economist Lu Ting told reporters that the Chinese government is expected to introduce a series of supportive measures after cutting interest rates last week. However, as confidence and sentiment need to be boosted, land sales decline and other factors lead to financial pressure, and transmission channels need to be dredged, the effect of relevant measures remains to be seen.
Recent data have shown year-on-year economic growth slowing in May as the base effect recedes. The year-on-year growth rate of social consumer goods retail sales slowed down to 12.7%, but its absolute level increased slightly compared with April; real estate sales weakened to a year-on-year decrease of 3%, and new starts fell another 27% year-on-year. Compared with April, the area under construction was roughly the same or slightly increased, but it was still at a weak and low level; the year-on-year growth rate of infrastructure investment accelerated to 8.8%, while the year-on-year growth rate of manufacturing investment was roughly stable; exports in May fell by 7.5% year-on-year, and the momentum of month-on-month growth was also strong Weakened.
Wang Tao believes that if the momentum of economic growth weakens further, future policy support may include: further relaxation of real estate policies, such as further relaxation of restrictions on house purchases in second-tier cities, lower down payment requirements for second-home loans, increased financial support for “guaranteed housing”, and improved Developer financing conditions, etc.; strengthen fiscal and quasi-fiscal expansion, such as accelerating the issuance of local government special bonds, raising and using a new batch of policy bank special infrastructure investment funds, thereby boosting infrastructure investment; the central government can provide local governments with temporary Credit and financial support to settle its debts to corporate suppliers; however, the central government is unlikely to distribute large-scale consumption or income subsidies directly to the household sector; further small interest rate cuts, and increased credit support to match the expansion of quasi-fiscal policies , and restructuring or replacing local government financing vehicle debt with lower-cost debt.
Mainstream institutions generally believe that some policy measures may be introduced before the end of July, but major fiscal policy support and macro policy shifts may need to wait until the Politburo meeting at the end of July. However, in the face of the high interest rate differential between China and the United States, people from all walks of life do not think that China has a lot of room to cut interest rates, and the more important thing is to boost the confidence of enterprises and consumers.
Exchange rate movements are still market-driven
On June 26, the People’s Bank of China will issue tenders for the sixth batch of central bank bills in 2023 through the bond bidding platform of the Hong Kong Monetary Authority’s debt instrument central settlement system (CMU). The sixth tranche of central bank bills has a term of 6 months (182 days). It is a fixed-rate interest-bearing bond. The principal and interest will be repaid at maturity. The date is December 27, 2023, and the due date will be postponed in case of holidays.
There is a view that the issuance of central bank bills will absorb the liquidity of offshore renminbi and play a role in supporting the exchange rate, emphasizing the importance of expected management of the renminbi exchange rate and bottom-line thinking. However, more views believe that this is more about maintaining the continuity of the issuance of central bank bills. Compared with last year, the trend of the RMB this year is more market-driven, and there is no obvious sign of central bank intervention.
Looking back at last year, during the RMB depreciation phase that began in mid-April, the central bank had launched adjustment tools several times, such as lowering the reserve requirement ratio for foreign exchange deposits twice by a total of 3 percentage points, and issuing 9 batches of RMB offshore central bank bills totaling 90 billion yuan. , announced on September 26 last year that the foreign exchange risk reserve ratio was raised from 0 to 20%. These measures have not yet been lifted.
Liu Jie, head of China’s macro strategy at Standard Chartered, previously told a reporter from China Business News that “at present, the large interest rate gap between China and the United States is still the main reason for the weak exchange rate of the RMB (the inversion of deposit rates between China and the United States is 2%~3%). Most of them have accumulated a certain amount of short positions, and exporters have a weak willingness to settle foreign exchange. We expect the Federal Reserve to cut interest rates at the end of the year at the earliest. Is it the last rate hike, or is it on hold, but either way 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 forward, China’s economy has generally maintained a steady upward trend, while some market institutions have predicted that the US economy may face a mild recession. As the interest rate cycle draws to a close, it will be difficult for the US dollar to continue to strengthen, and the spillover impact is expected to weaken. Overall, my country’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 macro-prudential policy tools in the foreign exchange market have also become more abundant. We are confident, qualified, and capable of maintaining the stable operation of the foreign exchange market.” He said.
China Business News Author: Zhou Ailin