The central parity rate of the RMB against the US dollar has been lowered by more than 2,000 basis points in the past two weeks, experts explain
2022-05-07 09:50:29Source: Economic Daily
On May 6, the central parity rate of the RMB against the US dollar was reported at 6.6332, down 660 basis points from the previous trading day. Since mid-to-late April, the exchange rate of the RMB against the U.S. dollar has changed from its strength at the beginning of the year, and has gone out of a wave of rapid declines. From April 19 to 29, the central parity rate of the RMB against the US dollar was lowered by 2,457 basis points. On May 5, the central parity rate of the RMB against the US dollar was reported at 6.5672, an increase of 505 basis points. This means that in the past two weeks, the central parity rate of the RMB against the US dollar has been lowered by more than 2,000 basis points.
In this regard, Zhou Maohua, a macro researcher at the Financial Market Department of China Everbright Bank, believes that the recent trend of the RMB is mainly affected by the short-term differentiation of fundamentals and policies between China and the United States. The domestic epidemic has spread in many places, demand has been suppressed, and the blocked industrial and supply chains may also drag down the future performance of foreign trade; the Federal Reserve has adopted a policy of aggressive interest rate hikes and balance sheet reductions to curb high inflation, which has driven the US dollar index to strengthen significantly, causing non-US currencies to weaken to varying degrees. . At the same time, since the fourth quarter of last year, the strong performance of the RMB exchange rate has slightly exceeded expectations, and has been revised to a certain extent due to changes in the internal and external environment.
In the early morning of May 5th, Beijing time, the Federal Reserve announced that it would raise the federal funds rate by 50 basis points, and at the same time announced that it would start to shrink its balance sheet on June 1st. Guan Tao, the global chief economist of BOC Securities, believes that the tightening of the Fed’s monetary policy is one of the important factors affecting the trend of the RMB exchange rate this year. Whether it is the weakening in mid-to-late March or the recent adjustment, it is basically driven by the offshore market. This reflects that after foreign capitals reduced their holdings of domestic renminbi financial assets, they purchased foreign exchange in the offshore market, driving the weakening of the offshore renminbi.
As the Fed’s interest rate hike expectations continue to strengthen, the US dollar index has continued to climb since April. Affected by this, major Asian currencies including the Japanese yen and the Korean won fell sharply against the US dollar, and the offshore RMB exchange rate was affected, which intensified the decline of the RMB.
“This exchange rate adjustment is the final result of the operation of the foreign exchange market under the combined effect of the domestic epidemic rebound, financial market fluctuations, and the convergence of interest rate differentials between China and the United States. The change in exchange rate level is not the goal deliberately pursued by the policy.” Guan Tao further said, In November last year, the People’s Bank of China proposed for the first time that “the degree of deviation is proportional to the power of correction”. The recent sharp decline is a concentrated release of the market’s short-selling pressure, which belongs to market correction rather than policy guidance.
Industry insiders believe that the recent exchange rate correction shows that the two-way fluctuation of the RMB exchange rate has not changed. This can not only better play the role of the exchange rate to stabilize the macro economy and adjust the automatic stabilizer of the balance of payments, but also reduce the exchange rate risk hedging operation cost of overseas investment institutions to increase their positions in RMB assets.
It is understood that due to the continuous strengthening of the RMB exchange rate, many large overseas asset management institutions had to step up their hedging operations against falling exchange rate risks, which invisibly weakened the overall rate of return of the RMB asset investment portfolio. Now, as the RMB exchange rate falls back to a reasonable valuation, the cost of its exchange rate risk hedging operation will be reduced, which will help boost the yield of the RMB asset portfolio.
“Usually, the devaluation of the renminbi makes imported goods and services denominated in the local currency more expensive, and for raw material importing companies, the cost becomes higher; but for some foreign trade companies whose production factors are in China, the local currency depreciates to a certain extent. It can enhance export competitiveness. Therefore, the devaluation of the renminbi is a ‘double-edged sword’.” Zhou Maohua said.
There are pros and cons to a moderate depreciation of the renminbi against the dollar. The main drawback is that speculative financial capital may be concentrated in a short period of time, resulting in an increase in the volatility of the domestic capital market. However, due to certain capital controls in my country, capital outflows are less likely to cause market panic or even systemic risks. At the same time, the moderate depreciation of the RMB is conducive to the continuation of the good momentum of domestic exports.
What is the next trend of the RMB exchange rate? Will the Fed’s interest rate hike and shrinking balance sheet affect China’s foreign exchange balance? Wang Chunying, deputy director of the State Administration of Foreign Exchange, said that in recent years, the resilience of China’s foreign exchange market has been continuously strengthened, and it has the basis and conditions to adapt to the current round of the Fed’s policy adjustment.
“In the future, the RMB exchange rate will fluctuate in both directions, and it will remain basically stable at a reasonable and balanced level.” Wang Chunying said that China’s economy is relatively resilient, the long-term positive development trend has not changed, the balance of payments structure is stable, and the current account remains stable. A reasonable scale of surplus and the long-term investment value of renminbi assets will provide fundamental support for the basic stability of the renminbi exchange rate.
“In the short term, the exchange rate of the RMB against the U.S. dollar may still fluctuate, but the basis for further depreciation of the RMB exchange rate has been significantly weakened. On the one hand, the effect of my country’s bailout policy to help enterprises has gradually emerged, the resumption of work and production has accelerated, and the economy has stabilized and picked up; on the other hand , my country’s foreign trade continues to remain resilient, supporting the RMB exchange rate. In addition, the aggressive tightening of monetary policy by the Federal Reserve will inevitably weigh on the U.S. economic outlook. Coupled with the tightening financial environment, the market has a high interest in the U.S. dollar, which is currently at a high historical valuation. Assets remain cautious.” Zhou Maohua said.
Industrial Securities released a report stating that although the renminbi is facing certain depreciation pressure recently, there is no need to worry too much about the large outflow of foreign capital, and the inflow of foreign capital into A shares is still a long-term trend. In the short term, after the panic outflow in March, overseas investors’ concerns about the Sino-US regulatory game have gradually eased, the superimposed market has been adjusted to a low level, and foreign capital has been able to maintain a strong focus and even return. In the medium and long term, although the nominal interest rate spread between China and the United States has inverted, the actual interest rate spread will remain at a relatively high level. In addition, foreign investment is still underweight A shares, and foreign investment inflow is still a long-term trend.
According to Guan Tao’s analysis, as long as the spread of the epidemic is effectively controlled, coupled with the advance of macroeconomic policies and timely reinforcement, the prospects for economic recovery are clear, market confidence is restored, foreign capital may return at any time, and the RMB exchange rate will be supported again.