After all, since the RMB exchange rate reform in 2015, the Central Bank of China has taken a number of measures to stabilize the exchange rate to ensure that the exchange rate does not break 7. A manager of a large Wall Street Hedge Fund pointed out to reporters that the RMB exchange rate easily and quickly fell below the 7-integer level, which forced many Wall Street financial institutions to liquidate their positions in an emergency manner and stop the loss of the long RMB bought by the Federal Reserve because of interest rate cuts.
In his view, the reason why the RMB exchange rate broke 7 in the past week is not only that the tightening trade situation has led many investment institutions to lower the value of the RMB exchange rate, but also that the Central Bank of China has been quietly weakening the exchange rate control measures for a period of time in the past. In the past, the RMB exchange rate formation mechanism was mainly composed of three parts. In the past, the central bank has priced the RMB exchange rate closer to the supply-demand relationship in the market, ensuring the basic stability of the exchange rate against a basket of currencies and counter-cyclical factors, while greatly reducing the influence of the latter two factors.
Behind this, the RMB exchange rate is easily overvalued due to regulatory measures. In the current situation of tightening trade and greater downward pressure on the economy, it is easy to cause the potential risks of capital outflow and financial market turmoil. Wei Shangjin, an academic visiting professor at Panhai International Finance College of Fudan University, pointed out to reporters. On the contrary, the RMB exchange rate is closer to the relationship between supply and demand in the market and presents a balanced and reasonable price, which will make capital feel safe, and the risk of capital outflow and financial market turbulence will be reduced accordingly.
Yi Gang, governor of the Central Bank, also mentioned on August 5 that in recent years, there have been some new situations in the international economic situation and trade frictions, and market expectations have also changed. Affected by this, many currencies have depreciated against the US dollar since August, and the exchange rate of RMB has also been affected to a certain extent. This fluctuation is driven and determined by the market. The Peoples Bank of China is fully experienced and capable of maintaining the smooth operation of the foreign exchange market and maintaining the basic stability of the RMB exchange rate at a reasonable and balanced level.
However, in Wei Shangjins view, breaking the RMB exchange rate above 7 does not necessarily mean that the RMB is entering the downward channel. The reason is that Chinas macroeconomic GDP growth and production efficiency are higher than those of the United States, and the Federal Reserve is tighter than monetary policy, so the RMB exchange rate against the dollar will still be in the appreciation channel in the medium and long term.
Over the past week, the renminbi has fallen below the seven-integer level against the dollar. - Song Wenhui Tu
Why not abide by 7 this time?
Unexpectedly, the exchange rate of the RMB against the US dollar has fallen so easily past the 7-integer level in the past week. The Wall Street hedge fund manager said with emotion. Since the exchange rate reform of RMB in 2015, the exchange rate of RMB has touched 6.97-6.98 twice in late 2016 and October 2018 respectively, which is only one step away from 7. But every time, the Central Bank of China will raise short-selling cost by introducing counter-cyclical factors, withdrawing the liquidity of RMB in offshore market, and deterring short-selling of RMB through short-talk. Let the RMB exchange rate quickly stabilize and rebound away from the 7 integer crossing.
So even with the recent tightening of the trade situation, many Wall Street investment institutions still habitually set the stop-loss price of the long RMB around 6.97-6.98, because they believe that the Central Bank of China will not let the exchange rate fall below the 7-integer threshold. He told reporters.
However, after the Federal Reserve began to cut interest rates for the first time in the past 10 years on August 1st, the RMB foreign exchange market showed an unusual picture. In the case of the dollars decline, the RMB, instead of rising, stepped out of an independent downward trend and fell much faster than the US dollar index, especially in the two short trading days of August 12th, the offshore people. The exchange rate of the dollar plunged more than 800 basis points, directly approaching 6.9735.
At that time, Wall Street financial institutions were particularly surprised why the Peoples Bank of China did not take measures to stabilize the exchange rate, but allowed the RMB exchange rate to fall rapidly. These hedge fund managers confessed to reporters that this also prompted many Wall Street financial institutions to stop losses and sell off their long positions in the RMB, which eventually led to the rapid fall of the RMB exchange rate both inside and outside the 7-integer level on August 5.
In Wei Shangjins view, the reason why the central bank did not take measures to stabilize the exchange rate as before is that the tightening of trade situation and other environmental changes have caused the central banks exchange rate management policy to turn. In the past, the sound economic fundamentals of China have prevented the RMBs balanced and reasonable exchange rate from falling below the 7, so the Central Bank of China has always adopted the 7 policy. When the exchange rate falls to 6.97-6.98 due to market speculation, the central bank will take necessary measures to stabilize the exchange rate to boost the exchange rate. Now, with the tightening of trade situation and the greater downward pressure of Chinas economy, the central bank will allow RMB exchange rate pricing to reflect the changes of market supply and demand more comprehensively, weaken the counter-cyclical factors and ensure the exchange basket. The influence of the sub-exchange rate is basically stable, so as to alleviate the pressure of capital outflow and the hidden danger of financial market turbulence.
The advantage of this approach is that the exchange rate is no longer overvalued. He said that both counter-cyclical factors and ensuring the basic stability of the exchange rate against a basket of currencies would cause the RMB exchange rate to be overvalued, but the current passive interest rate cut by the Federal Reserve highlights the strong economic growth of the United States (global capital may return to the United States in the short term), and trade tensions affect Chinas economy. Under the circumstances of economic growth, this overvaluation of exchange rate will instead stimulate the increase of capital outflow pressure, which will pose a hidden danger to the severe turbulence of financial markets and sustainable economic growth. On the contrary, the exchange rate more fully reflects the changes in the relationship between supply and demand in the market, which will make the capital feel that the exchange rate will not fall sharply and the corresponding outflow pressure. Naturally, it fell sharply.
However, it will certainly take some time for the market to digest the shift in exchange rate management measures of the Central Bank of China. The manager of the large Wall Street hedge fund told reporters that after the RMB exchange rate both inside and outside China fell below the 7-integer level on Monday morning, most Wall Street investment institutions were basically confused about the situation and the reasons, and could only allow the procedural quantitative trading model to automatically settle the long positions of the RMB to stop losses and leave the market, leading to offshore people. The exchange rate fell rapidly to around 7.10.
At first, we thought that the rapid breakdown of the exchange rate of 7 may be the result of the rapid decline of the RMB exchange rate by many Wall Street financial institutions, which directly lowered the RMB equilibrium exchange rate to below 7 due to the heavy downward pressure of Chinas economy caused by the tightening trade situation; but later, we learned that the rapid decline of the RMB exchange rate is actually the product of the wave of speculative capital. He told reporters. This is closely related to the short selling mode of speculative capital. For example, many speculative capital still make short profits by borrowing offshore RMB positions from foreign exchange brokers on a weekly basis. Therefore, they must be eager for the RMB exchange rate to fall sharply in a short week to maximize short selling returns. Aware that the Central Bank of China may take measures to stabilize the exchange rate after the exchange rate quickly breaks 7, it will do its utmost to depress the RMB exchange rate and expand its decline in order to obtain higher short-term short-selling returns before the central bank acts.
In his view, this is also one of the main reasons why the RMB exchange rate can stabilise rapidly by releasing the news of 30 billion offshore bills to be issued on August 6. Once the central bank takes measures to stabilize the exchange rate, these speculative capital will leave the market quickly.
Ironically, in the past, the Central Bank of China regulated the RMB exchange rate through counter-cyclical factors and other measures. The U.S. Treasury Department did not think that the RMB was manipulated. Now the Central Bank of China let the market supply-demand relationship play a greater role in the RMB exchange rate pricing mechanism, while the U.S. Treasury Department listed China as a currency manipulator. Wei Shangjin spoke frankly. Behind this, the United States is still unwilling to see the devaluation of the RMB, resulting in the continued expansion of the Sino-US trade deficit. But in fact, the reason why the Sino-US trade deficit is so large is closely related to the tax reform policy of the United States itself, the difference of economic structure between China and the United States, and the division of labor pattern of the global commodity industry chain. It is by no means a requirement that RMB does not depreciate can be solved.
Several foreign exchange traders of state-owned banks pointed out that even under pressure from the United States, the supply-demand relationship in the future market will still play a more important role in the RMB exchange rate pricing mechanism. The reason is that under the current tightening trade situation and greater economic downturn pressure, this is to curb the pressure of capital outflow and financial market turbulence. One of the most effective ways to increase the number of patients with double enlargement.
On August 5, Yi Gang also mentioned that at present, Chinas economy has made steady progress, and its economic growth is at the forefront of the major economies, showing tremendous resilience, potential and room for manoeuvre. Overall balance of payments, sufficient foreign exchange reserves, more and more hedging enterprises in the foreign exchange market, and the interest margins between China and major developed economies in the appropriate range, can support the basic stability of the RMB exchange rate. And whether from the basic aspects of Chinas economy, or from the balance of supply and demand in the market, the current RMB exchange rate is at an appropriate level.
Exchange Rate Fluctuation Elasticity Increase Instead of Interest Rate Reduction?
It is worth noting that in the face of more and more emerging market central banks following the Federal Reserve to cut interest rates rapidly, the Central Bank of China did not follow up the rate cut quickly and did not take measures to keep the 7, which led many financial markets to speculate that the central banks move was aimed at relaxing the volatility of the RMB exchange rate to replace the interest rate cut measures and coping with the current tightening trade situation. External shocks.
After all, the interest rate cut will not only cause the RMB exchange rate to fall below 7 as fast as possible, but also narrow the interest rate gap between China and the United States, which will increase the pressure of capital outflow, which is not conducive to financial market stability and macroeconomic stabilization and rebound. A domestic private equity macroeconomist told reporters that, more importantly, greater flexibility in exchange rate fluctuations can also improve the current business pressure of foreign trade enterprises and ensure stable growth of Chinas exports.
Wei Shangjin also pointed out to reporters that whether the effect of expanding the flexibility of exchange rate fluctuation is better than that of interest rate reduction measures needs to be weighed and evaluated from multiple dimensions: whether employment pressure (especially foreign trade industry) has been effectively alleviated in the short run; whether monetary and fiscal policies have sustainability to stimulate the economy in the medium and long run Medium and long-term transformation and development.
In fact, it is also a new challenge for many central banks to relax monetary policy. Marc Chandler, head of global foreign exchange strategy at Brown Brothers Harriman, told reporters that, for example, many financial institutions on Wall Street have found that the Fed needs to raise its benchmark interest rate to more than 5% before it has enough room to cut interest rates to cope with potential economic downturn pressures. Today, the Feds benchmark interest rate has only increased. From 2.25% to 2.5%, the Fed will have to cut interest rates to cope with the risk of economic recession. As a result, the Fed will not have enough room to cut interest rates in the future to cope with the growing pressure of economic downturn. Finally, monetary policy dilemmas such as negative interest rates and sudden increases in deflationary pressures may arise.
In his view, the reason why the Central Bank of China is not eager to follow the Feds interest rate cuts at present is to take precautions in a certain extent, avoiding premature interest rate cuts to compress its own monetary policy operation space, and it is difficult to cope with the unknown economic fluctuation risk in the future.
Sam Laughlin, an analyst at MKSPAMP, a hedge fund, told reporters that, whether following the Feds interest rate cuts or easing the flexibility of exchange rate fluctuations, the monetary policy demands of central banks in emerging market countries are actually the same way - all aimed at preventing exchange rate overvaluation, leaving behind future capital outflow pressures and severe turbulence in financial markets. Hidden danger.
But the former is to prevent the Feds interest rate reduction cycle from causing hot money inflows to artificially push up the exchange rate, while the latter is to reduce the influence of its own regulatory measures on the overvaluation of the exchange rate. He pointed out. But in the medium and long term, the current non-interest rate reduction measures also reserve more room for future flexible operation of monetary policy.
Wei Shangjin told reporters that Chinas fiscal and monetary policy still has a lot of room to stimulate economic stability, rebound and transformation, not only follow the Federal Reserve interest rate cut a way.
Source: Responsible Editor of Economic Reporting in the 21st Century: Wang Xiaowu_NF