Renminbi Pass through Renminbi Pass: Whose Bottom Line Did 7 Break Through?

 Renminbi Pass through Renminbi Pass: Whose Bottom Line Did 7 Break Through?

The market is muddled! The Renminbi fell sharply against the dollar on the day it broke 7, but A shares fell less than U.S. stocks, indicating the central banks stabilization effect. The next day, the third day, the rise and fall are different; gold is soaring all the way.

Whose bottom line did 7 break through? America is in a hurry! On August 6, 25 years later, the US Treasury Department labeled China as a currency manipulator for the sixth time. Opposition! We are not currency manipulators. The Central Bank of China declared that the label did not meet the so-called exchange rate manipulator quantitative criteria set by the US Treasury. It was a wayward unilateralism and protectionist act, seriously undermining international rules, and would have a significant impact on global economy and finance.

This is a thrilling jump in the global financial market that took place before the seventh night of the Chinese lunar calendar in 2019. If the break of RMB 7 on August 5 is regarded as a price breakthrough, its historical significance may not be inferior to the exchange rate reform.

From price (taboo) pass to market pass to exchange rate manipulator label, the leap of RMB has also put forward new propositions and new thinking for Chinas financial reform and opening-up, which has entered the 10-year process of RMB internationalization.

Huang Yiping, chairman of the CF40 Academic Committee and vice president of the National Development Institute of Peking University, said that a managed clean floating exchange rate should be implemented as soon as possible to help maintain macroeconomic stability and promote the internationalization of the RMB. The lack of exchange rate liquidity may make China passive in international trade disputes, and is not conducive to the internationalization and high-quality development of RMB.

Wei Benhua, an IMI academician and former deputy director of the State Administration of Foreign Exchange, said that the United States would use its own laws, make its own rules, arbitrarily suppress other countries and eventually eat its own fruit. In the International Monetary Fund, we should strive to unite the majority of countries to reject the attempt of the United States to exert pressure on our country through international organizations.

In the future, the exchange rate will fluctuate up and down to break through various barriers on the basis of market supply and demand. This is also the inherent requirement of Chinas economy, which has entered a stage of high-quality growth; because it is not appropriate to use foreign exchange reserves to keep a certain price point.

In the past 40 years, the RMB exchange rate has undergone several rounds of major reforms, basically achieving the goal of market-oriented, but each reform is a breakthrough.

Break or break

If broken, it will break. Stones will break, but not be destroyed. It seems that there is no danger at present. The domestic and foreign capital markets are gradually digesting the shock wave of RMB breaking through 7.

Actually not. Market expectations are basically stable. Guan Tao, a former director of the Department of Balance of Payments of the State Administration of Foreign Affairs and an economic advisor at Wuhan University, said that the logic is: from the perspective of the domestic foreign exchange rate differential, CNH abroad is weaker than CNY in China, but the gap has not continued to expand. On August 5, the difference between domestic and foreign prices jumped from 347 basis points on the previous trading day to 633 basis points, narrowed to 216 basis points on the 6th and 413 basis points on the 7th. From the perspective of one-year non-deliverable Renminbi Forward Trading (NDF), the implied depreciation expectations of RMB exchange rate are 2.4%, 1.8% and 1.3% respectively, and gradually converge.

Although the Central Bank of China expressed its policy confidence on the day of the break of the 7th, it said that the current exchange rate of RMB is at an appropriate level, both in terms of the fundamentals of Chinas economy and in terms of the balance between supply and demand in the market. Although the RMB exchange rate has fluctuated recently due to external uncertainties, I am confident that the RMB will continue to be a strong currency. Yi Gang, governor of the Central Bank, said. But the market still sees some potential distortions in the central banks shouts twice a day.

According to Peter Cardillo, chief market economist at Sparta Capital Securities, yields are plunging and gold prices are soaring. This has raised concerns about the economic impact of the trade war. Investors need to be cautious.

According to FX168 financial news, Jeff Kilburg, chief executive of KKMFinancial, said that more and more funds were flowing into German government bonds... This will scare people because they are continuing to transfer funds -- $8 trillion in negative yield assets at the end of last year. We currently have negative yield assets of $15 trillion.

News from the Hong Kong Stock Exchange shows that under the fluctuation of RMB exchange rate driven by international factors, many investors choose the currency futures of the Hong Kong Exchange, the largest offshore RMB center in the world, as a currency risk management tool.

While market sentiment is slowing down, hedge assets are soaring. Gold prices hit a multi-year high. For the eighth consecutive month, the Peoples Bank of China increased its gold reserves to 62.26 million ounces, an increase of 320,000 ounces. Beyond China, many emerging market countries have also sharply increased their holdings of gold assets this year. According to the report of the World Gold Association, as of the first half of this year, the total purchases of gold by central banks amounted to 374.1 tons, the largest net increase of the worlds official gold reserves in the same period. Behind the crazy gold, all kinds of game forces are intertwined, and the global financial market is full of uncertainty.

Whose knot

What a ridiculous result! The market is puzzled by this. On August 6, U.S. Treasury Secretary Mnuchin listed China as a currency manipulator and said he would ask the International Monetary Fund to intervene.

In the view of Yu Yongding, a member of the Academy of Social Sciences, it is totally unreasonable for the United States to list China as a currency manipulator. First, there is no current international standard of exchange rate manipulator. Second, even if the United States has three standards for exchange rate manipulator, it must meet three standards at the same time in order to position a country as a exchange rate manipulator. China does not conform to any other criteria except its surplus.

Market participants did not anticipate this outcome, many people believe that the RMB break 7 at this time will not bear the name of manipulating the exchange rate. Because according to Chinese logic, intervention in the foreign exchange market usually means using foreign exchange reserves or other means to keep the exchange rate stable and avoid capital outflow.

But the United States is another set of logic. According to the US statement, in recent days, China has taken concrete measures to depreciate the RMB, that is, in the past, China has been actively using these tools (foreign exchange reserves intervene in the market), but now it maintains a large amount of foreign exchange reserves. The background of these actions and the untrustworthiness of Chinas market stability principle confirm that the purpose of Chinas currency depreciation is to gain unfair competitive advantage in international trade. According to the logic of the United States, RMB can only appreciate, not depreciate. It seems that preventing RMB depreciation is not exchange rate manipulation, which is obviously contrary to the principle of exchange rate marketization.

Beyond China, the United States has a different voice. Steven Mnuchin, the US Treasury Secretary, listed China as a `currency manipulator, apparently conforming to his `bosspolicy, which not only damaged his credibility, but also damaged the credibility of the US Treasury Department. Lawrence Summers, former US Treasury Secretary and former President of Harvard University, wrote on August 6.

And questioning like Summers is not an isolated case. On August 5, Eastern Time, the top four Fed chairmen published a rare joint article, signed by Paul Volcker, Alan Greenspan, Ben Bernanke and Jane-t Yellen, calling on the Federal Reserve to remain independent.

Back to American logic, why is it so afraid of RMB devaluation?

Peng Wensheng, chief economist of Everbright Securities, believes that for the United States, if the dollar appreciates against the RMB, Chinese exporters will be more willing or more able to accept lower dollar prices; the appreciation of the dollar will help offset the cost impact of tariffs and benefit American consumers, but not the overall economic growth.

Peng Wensheng analyzed the change of exchange rate from June last year to the present. The RMB has depreciated nearly 8% against the US dollar, but the effective exchange rate of the RMB against a basket of currencies has depreciated slightly by about 1%, indicating that the RMB has appreciated against other currencies. Up to now, the exchange rate fluctuation basically accords with the need for devaluation implied in the general trade model to offset the impact of tariff imposition, and does not bring about competitive devaluation. The exchange rate adjustment is orderly.

However, the logic that can not be ignored is that the tariff imposed by the United States and the devaluation of the RMB exchange rate are not tools for trade negotiations or game between the two sides. As a deficit country, the tariff imposed by the United States will inevitably bring about a strong dollar. Peng Wensheng pointed out.

If export pressures only depend on expanding domestic demand to grow steadily, will there be a current account deficit in the near future? Perhaps the effective adjustment of exchange rate should not be blocked too much. We should increase the flexibility of exchange rate formation mechanism and let market supply and demand play a role. Peng Wensheng said.

In fact, the market-oriented reform of Chinas exchange rate has always been to pursue a flexible and managed floating exchange rate system based on market supply and demand.

But for a long time, we seem to suffer from the phobia of exchange rate fluctuation. Yu Yongding feels that China is the least country in the world to be afraid of exchange rate fluctuation. According to the classification of the International Monetary Fund, Chinas current exchange rate regime is a crawling peg in the soft peg category. At present, almost all OECD countries and major developing economies adopt floating or free floating exchange rate regimes. But Chinas economic fundamentals do not support a sharp devaluation of the renminbi.

Looking back on several major reforms of RMB exchange rate in the past 40 years, such as: from 1979 to 1984: the change from single to double to single exchange rate; from 1985 to 1993: the coexistence of RMB official exchange rate and foreign exchange adjusting price, and the return to double exchange rate; 1994: the reform of exchange rate; 2005: referring to a basket of currencies. Bank adjustment, a single, managed floating exchange rate mechanism; August 11, 2015: The central bank reformed the RMB mid-price quotation mechanism.

Among them, the foreign exchange management system in 1994 once again realized the exchange rate merger and implemented a single, managed floating exchange rate system based on market supply and demand. This exchange rate reform is considered to be the most difficult and successful reform.

This year, China was labelled as a currency manipulator for the fifth time. This year, China also has a real foreign exchange market. The first four times are May, December, 1992, May and November, 1993, which correspond to the major reform stage of exchange rate in China. It may be concluded that when the RMB tries to break through the barrier, it is vulnerable to the restraint or suppression of the US under the name of exchange rate manipulator.

Besides national competitiveness, it may also be due to the economic adjustment of exchange rate. Lack of flexible exchange rate is one of the most important reasons for the unstable, unbalanced, uncoordinated and unsustainable growth of our economy. Yu Yongding said.

Of course, reforms such as RMB internationalization, capital account opening and exchange rate reform have a certain order.

In addition, financial reform and opening up has become a new grasp of economic growth.

Data show that tax revenue grew at a rate of - 3.3% in the second quarter, the lowest since 1998. Under this background, export tax rebate of 977.9 billion RMB is equivalent to defusing the pressure of balance of payments by fiscal means, but this should be adjusted by exchange rate. The increase of exchange rate elasticity is imperative.

Defense and Counteraction

However, if we carefully study the RMB breaking through the seven barriers, it is not difficult to find that the direct reason lies in the escalation of Sino-US trade frictions. This can be seen from the performance of the past year.

For example, China-US relations (negotiations) have eased, the RMB has risen, and vice versa. Its negative correlation even exceeds the intermediate price of RMB and US dollar index.

The central bank also pointed out that due to unilateralism and protectionist measures and expectations of tariff imposition on China, the RMB has depreciated against the US dollar, breaking through 7 yuan. Xiong Yuan of Guosheng Securities Research Institute believes that the possibility of a cliff-like decline of the RMB is very low. Considering the hedging demand for tariff increases and the deduction of the technical line, 7.2-7.3 is expected to become the next defense line.

From the perspective of CNY and CNH price difference expectation measurement indicators, the current depreciation expectation of RMB tends to be stable. The issuance of offshore RMB central invoices is also a proof. Although, according to the central bank, the move is aimed at improving the yield curve of Hong Kongs RMB bonds, the central banks intention to stabilize the exchange rate is no different from that of the market.

Thus, even if the RMB breaks 7 at present, it does not mean that there will be too much change; Chinese policymakers may not like to see the weakening of the RMB in the process of internationalization for 10 years. As Yi Gang said, although the RMB exchange rate has fluctuated recently under the influence of external uncertainties, it will continue to be a strong commodity for the RMB. Money is full of confidence.

However, considering both internal and external economic factors, there are also hidden worries about the RMB breakthrough.

From the unjustified labeling of exchange rate manipulator by the United States to China, it may be seen that the US wants to shift from trade frictions to other areas. Including finance? In the name of exchange rate manipulation, is it possible to conduct a financial war? Hence, the Chinese side can be restrained by many sides.

Taking exchange rate as an example, it is difficult for RMB to rise without devaluation because of the hard constraints such as promoting financial openness and financial pressure. In this regard, the central banks direct tool is to use foreign reserves to stabilize the exchange rate; this may be what the United States wants to see - to weaken our core competitiveness. Under the background of financial globalization, adequate foreign reserves can be regarded as an indicator of confidence. We have learned from previous experience that in April and June 2019, the peak of foreign reserves reached $390 million; in the past few years, we have used $900 billion to stabilize the exchange rate, but this is clearly not a long-term solution.

Ren Zeping, chief economist of Hengda Research Institute, believes that financial security is related to national security. We can adopt the strategy of parallel defense and countermeasure, and equal emphasis on reform and adherence. He gave several suggestions:

First, in the financial system, in the short run, cross-border capital management can be strengthened. In the long run, we should adhere to the direction of internationalization and market-oriented opening of the financial system and capital account, but we should adhere to the gradual and rhythmic opening up and promoting the liberalization of capital account. The initiative is mine. The rhythm and order are not in the United States.

Secondly, in terms of financial subjects, we should improve the competitiveness of Chinas financial institutions, strengthen corporate governance and promote the reform of state-owned enterprises.

Fourthly, in terms of exchange rate, we should not be forced to appreciate and depreciate voluntarily if necessary, but the whole is mainly stable; if the US imposes punitive tariffs because it considers China as a currency manipulator, we should simultaneously raise tariffs; accelerate the process of RMB internationalization, de-dollarization, and expand RMB settlement, etc.

Financial warfare generally refers to the direct use of financial means by hostile parties to attack each other. It may use all possible means. Wang Yongli, former vice president of Bank of China and chief economist of Haiwang Group, said. He suggested that what needs to be done now is to remain calm and carefully analyze the possible resources and means of both sides so as to prepare for various situations. When needed, the RMB can be handed over to the market for a one-time sharp depreciation, eliminating arbitrage space, and increasing the intensity of foreign exchange supervision. Fundamentally, we need to deepen reform and opening up and maintain stable economic and social development. In this regard, China has tremendous space and potential. When the United States pursues unilateralism, it adheres to equality, mutual benefit and win-win situation, which has won wide recognition and accession from the international community. Wang Yongli told the Economic Observer. Source: Responsible Editor of Economic Observation Network: Yang Bin_NF4368

Financial warfare generally refers to the direct use of financial means by hostile parties to attack each other. It may use all possible means. Wang Yongli, former vice president of Bank of China and chief economist of Haiwang Group, said.

Fundamentally, we need to deepen reform and opening up and maintain stable economic and social development. In this regard, China has tremendous space and potential. When the United States pursues unilateralism, it adheres to equality, mutual benefit and win-win situation, which has won wide recognition and accession from the international community. Wang Yongli told the Economic Observer.