In other words, in just half a year, the RMB has appreciated by nearly 10% against the US dollar, and in the past ten trading days, it has reached a new high in two years.
What does appreciation mean?
As for the strength of the RMB against the US dollar, the market believes that the main reason is the weakening of the US dollar index. The dollar index has returned to its level four years ago.
Xu Weihong, vice president and chief economist of Yongxing securities, believes that China and the United States are the two largest economies in the world, and the exchange rates of the two countries fluctuate. First of all, the strength of the RMB in this half year is mainly due to the weakness of the US dollar.
Xu Weihong believes that the pricing mechanism of the RMB exchange rate is a weighted algorithm with a basket of currencies, mainly US dollar, and taking into account the worlds major economies and trading partners. This is similar to the US dollar index commonly used in the international market. In the past six months, the US dollar index has dropped from a high of 103 to 91.75, with a maximum drop of nearly 12%. At present, the US dollar index is around 93, that is, the half year drop of 10%, which is basically the same as the appreciation rate of RMB against the US dollar. In other words, if the U.S. dollar index is stable, unless China and the U.S. macro-economy deviates from the trend, the appreciation rate of RMB against the U.S. dollar will be greatly logical.
So why is the dollar so weak? In particular, the US dollar depreciated by 12% against the euro. In other words, the RMB has depreciated against the euro in the past six months, so we should not talk lightly about the irrational comprehensive appreciation of RMB. Old traders in international finance know that there are many demons in the election year of the United States. In the exchange rate market, the Republican party emphasizes efficiency, holds high the big stick of trade war and foreign affairs provocation, and pursues a strong dollar policy; while the Democratic Party pursues equality, likes to engage in national health care and diplomatic doggerel, and weakens the choice of the dollar. At least, todays dollar index has returned to the level it was when trump was elected four years ago. Financial markets are zero this time, and there is no bet on either side.
Will it continue to appreciate in the future?
After the rapid appreciation of RMB against US dollar, how will the RMB exchange rate change in the future?
Xu Weihong believes that the biggest risk in Chinas economy is still the various non-performing assets of shadow banking, real estate and local government financing platforms. With the global economy entering the recovery logic, the central bank has no reason and is not willing to cut interest rates in the fourth quarter. The positive fiscal policy has also been criticized by excessive infrastructure investment recently. We should know that Japan and South Korea, with the same Confucian cultural background, were severely hit by the financial crisis caused by non-performing assets on the basis of a per capita GDP of 10000 US dollars. The Chinese monetary authorities are very aware of the lessons learned from the past.
He believes that under such a background, China will certainly be the only major economy with normal monetary policy in the world. The three red lines of real estate will not relax. The RMB exchange rate is back on the Sino US debt margin and there is no technical reason for devaluation against the US dollar. Of course, if the dust of the US election is settled in two weeks, the international investment institutions will adjust accordingly, no matter which side wins.
Zhou Maohua, a financial market analyst at Everbright Bank, believes that the recent strong performance of the RMB against the US dollar is mainly driven by the domestic and foreign economic fundamentals and expectations of policy differentiation. The recent weakening of the US dollar index has boosted investors enthusiasm for making long RMB. Looking forward to the future trend, the recent differentiation of economic fundamentals and policies at home and abroad is still expected to support the RMB exchange rate, but from the perspective of internal and external environment, the current round of RMB exchange rate rise is close to the end, and then the RMB is expected to turn to a strong two-way volatility pattern.
Second, there are still many uncertain factors in the world. There will be uncertainties in the US election, brexit, global epidemic situation, geopolitical situation and US foreign policy after the US election, which will support the US dollar. At the same time, from the perspective of the fundamental comparison between the United States and Europe, the unilateral trend of the euro against the US dollar is not supported. After the recent two-and-a-half-year high, the rising momentum of the euro against the US dollar has weakened, showing a horizontal volatility trend.
Third, the central bank policy toolbox is rich. Once the market deviates from the fundamentals and irrational sentiment, it is not ruled out that the central bank will use tools including counter cyclical factors to guide the market to return to rationality. In addition, the central bank intends to communicate with the market to stabilize market expectations due to the recent liberalization of foreign currency deposit interest rate and the reduction of foreign exchange risk reserve ratio.
Central bank attitude: successful economies must maintain currency stability
The exchange rate of RMB against the US dollar has risen rapidly in recent half a year, and the central bank has adjusted the RMB exchange rate to a certain extent.
The central banks attitude is still to keep the value of the RMB stable.
On October 10, Yi Gang, governor of the Central Bank of China, wrote an article pointing out that throughout the world, successful economies must maintain a stable currency value, which includes not only the stability of domestic price level, but also the basic stability of exchange rate.
Yi Gang pointed out that in recent years, the peoples Bank of China has focused on grasping the relationship between the expansion of the financial industry, the reform of the RMB exchange rate formation mechanism and monetary policy in accordance with the changes in the domestic and foreign situations. Novel coronavirus pneumonia has been appreciated by RMB in the past 100 years, and the impact of the international financial crisis, Sino US economic friction and new crown pneumonia outbreak has been appreciated by about 21% since July 2005. The nominal effective exchange rate calculated by the BIS has been around 34%, and the effective exchange rate has appreciated by about 47%. Thanks to Chinas rapid economic growth and the steady rise in the value of RMB, China is firmly the second largest economy in the world in terms of hard currency, while the per capita gross national income continues to grow. According to World Bank statistics, Chinas per capita gross national income increased from 1760 US dollars in 2005 to 10410 US dollars in 2019. Nowadays, whether it is enterprises import, foreign investment, or peoples travel abroad, shopping and schooling, they can deeply feel the real benefits brought by the basic stability of RMB exchange rate.
To promote the internationalization of RMB?
Shen Jianguang, chief economist and President of Jingdong Institute of digital science and technology, believes that due to the asymmetric characteristics of Chinas capital control, that is, the overall inflow is more encouraged, but there are more restrictions on outflow, which also promotes the rise of RMB to a certain extent. Under the background of RMB appreciation, it is suggested that on the one hand, financial opening should be expanded; on the other hand, regulatory measures should be relaxed to encourage enterprises to go out and accelerate the two-way flow of capital. This will not only help maintain the stability of the exchange rate, but also create a good opportunity for the acceleration of RMB internationalization.
He believes that Chinas current capital control is not asymmetric, that is, encouraging inflow and restricting outflow on the whole, and to a certain extent, boosting the upward trend of RMB. From the perspective of capital inflow, in recent years, the central bank and other financial departments have issued more than 50 Measures for opening up to the outside world, and the speed of financial opening is relatively fast. From the perspective of capital outflow, since the reform of the RMB middle rate exchange rate in August 2015, the RMB exchange rate has been faced with significant devaluation pressure for several times, and the capital outflow policy based on the macro Prudential background has been increased. For example, the collection of foreign exchange risk reserves by financial institutions on behalf of customers in forward sales of foreign exchange is an important tool for the central bank to manage foreign exchange liquidity, which has been maintained since the devaluation in August 2018.
In addition, the counter cyclical factor and adjustment of the banks comprehensive position of foreign exchange settlement and sales are often used for cross-border fund management. In the field of direct investment, before the devaluation of 15 years, China held an open attitude towards foreign investment of domestic enterprises. In 16 years, foreign direct investment (ODI) even exceeded that of foreign direct investment (FDI). However, under the pressure of several devaluations in recent years, China is strict with Chinese enterprises to go abroad, and ODI has also dropped accordingly. Shen Jianguang believes that in the past few years, under the pressure of RMB devaluation and capital outflow, the process of RMB internationalization has been affected. Against the background of increasing risks of anti globalization and complicated and changeable Sino US relations, it is very rare for RMB to remain basically stable, which also reflects the policy determination. However, in the current good opportunity to further boost the internationalization of RMB, we should accelerate a number of capital market reform measures, increase the flexibility of RMB, and at the same time, expand financial opening, encourage two-way capital flow, and help accelerate the internationalization of RMB. Source: Chen Hequn, editor in charge of economic report in the 21st century_ NB12679
Shen Jianguang believes that in the past few years, under the pressure of RMB devaluation and capital outflow, the process of RMB internationalization has been affected. Against the background of increasing risks of anti globalization and complicated and changeable Sino US relations, it is very rare for RMB to remain basically stable, which also reflects the policy determination. However, in the current good opportunity to further boost the internationalization of RMB, we should accelerate a number of capital market reform measures, increase the flexibility of RMB, and at the same time, expand financial opening, encourage two-way capital flow, and help accelerate the internationalization of RMB.