RMB exchange rate breaks record! Will stocks and house prices rise with it

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 RMB exchange rate breaks record! Will stocks and house prices rise with it


Compared with the strong appreciation of RMB, the central bank is more willing to keep the exchange rate stable. On October 10, the central bank lowered the foreign exchange risk reserve ratio of forward foreign exchange sales business from 20% to 0, indicating that it hopes to break the unilateral appreciation of RMB and maintain the basic stability of the exchange rate.

What does sustained appreciation mean?

The strength of the RMB against the US dollar is mainly due to the weakening of the US dollar index. Currently, the dollar index has returned to the level it was 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. The strength of the RMB in this half year is mainly due to the weakness of the US dollar.

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. Therefore, we should not talk lightly about the irrational and comprehensive appreciation of RMB. Old traders in international finance know that there are many good and bad election years in the United States. At present, the dollar index has returned to the level when trump was elected four years ago. The financial market is zero this time, and there is no bet on either side. Xu Weihong told reporters.

How will the trend of RMB exchange rate change in the future? Xu Weihong said that looking forward to Chinas economy, the biggest risks are still various non-performing assets of shadow banking, real estate and local government financing platforms. With the global economy moving into a recovery logic, the central bank has no reason and is not willing to cut interest rates in the fourth quarter, and its proactive fiscal policy has recently been criticized for excessive infrastructure investment.

He believes that in such a big context, China will certainly be the only major economy with normal monetary policy in the world, the three red lines of real estate will not be relaxed, and the RMB exchange rate is backed by the debt spread between China and the United States, and there is no technical reason for devaluation against the US dollar. Of course, if the dust settles in the US election two weeks later, no matter which side wins, the international investment institutions will adjust accordingly.

The strength of the RMB against the US dollar is mainly due to the weakening of the US dollar index. Picture green

Specifically, first of all, fundamentals do not support the strong trend of RMB exchange rate. The balance of payments has basically maintained a balanced pattern. In recent years, the northward capital of the stock market has shown a two-way fluctuation. The domestic economy has not yet touched the potential growth, and the monetary and credit policies have not turned to tighten.

Secondly, there are still many uncertainties 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.

Successful economies must maintain currency stability

In the process of the continuous strength of RMB, the central bank has adjusted the RMB exchange rate to a certain extent.

On October 10, the peoples Bank of China announced that it would reduce the risk reserve ratio of forward foreign exchange sales to 0. The market believes that this mainly reflects the central banks policy intention to curb the rapid appreciation of RMB, avoid short-term capital inflow and push up asset prices. This shows that, compared with the unilateral appreciation of the RMB, the central bank is more willing to maintain the stability of the RMB value.

Yi Gang pointed out that if the exchange rate depreciates substantially, even if the domestic currency value of GDP goes up, the value of other international reserve currencies will come down. This will not only affect the countrys position in international competition, but also affect the peoples purchasing power. The drastic fluctuation of exchange rate will also affect the confidence of domestic and foreign economy, which is not conducive to the normal trade and investment activities of economic entities. Since the collapse of the Bretton Woods system in the 1970s, there have been many cases of currency crisis in the world. Some emerging economies which have become high-income countries have returned to middle-income countries due to the sharp depreciation of their currencies.

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 since the reform of the RMB exchange rate regime in July 2005. After the impact of the international financial crisis, the Sino US economic and trade frictions and the new crown pneumonia epidemic, the RMB exchange rate has appreciated by about 21%. The effective rate of the Bank of International Settlements has risen by about 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.

Shen Jianguang suggested that in the context of RMB appreciation, on the one hand, we should expand financial openness, on the other hand, we should relax regulatory measures, encourage enterprises to go abroad, 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.

At present, Chinas capital control is not asymmetric, that is to say, the overall situation of encouraging inflow and limiting outflow has also boosted the upward trend of RMB to a certain extent. Shen Jianguang analyzed that from the perspective of capital inflow, in recent years, the central bank and other financial departments have introduced 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 facing significant devaluation pressure for several times, and the capital outflow policy has been increased based on the macro Prudential background. 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.

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 the RMB, we should accelerate a number of capital market reform measures, increase the flexibility of the RMB, and at the same time, expand financial openness and encourage two-way capital flow, which will help speed up the internationalization of RMB.

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RMB exchange rate has broken the record again!

On the days foreign exchange market, the spot exchange rates of onshore and offshore RMB against the US dollar also reached new highs. As of 3:30 this afternoon, the former reached the highest of 6.6413, while the latter reached 6.6237. The US dollar index fell to the lowest value in more than a month, reaching 92.77.

Why is the RMB rising violently? Will such a rise lead to the appreciation of other assets? How will the exchange rate go in the future?

Internal and external factors boost RMB appreciation

Chinas latest economic report card has been released recently. Economic growth in the first three quarters turned from negative to positive, and in the third quarter, it achieved a year-on-year growth of 4.9%.

The economic indicators of the third quarter fully prove that the recent appreciation of RMB exchange rate mainly comes from the support of economic fundamentals. Wang Youxin, a researcher at the Research Institute of Bank of China, told China news agency that from the first quarter to the third quarter, GDP growth rose quarter by quarter, rebounding from - 6.8% to the current 4.9%. Indicators including industrial production, service industry, market sales, fixed asset investment, import and export have improved significantly, and the economy has gradually turned to normal.

At the same time, the recent epidemic situation in Europe and the United States and other economies has continued to rebound and spread, and the prospect of economic recovery is unclear, which objectively plays a supporting role in the RMB.

Zhao Yaoting, an expert at Jingshun, believes that there are three main reasons for the rising market expectation of RMB bullish. First, the market has expectations for the relaxation of Sino US relations; second, a large amount of global capital continues to increase RMB assets; third, compared with the resurgence of the European and American epidemic, Chinas economy is the first to achieve recovery, which improves the safe haven nature of RMB assets.

What is the impact of the rapid appreciation of RMB? Xie Yaxuan pointed out that in the real economy, the stronger RMB exchange rate is not conducive to export competitiveness. Currently, the RMB exchange rate index has risen by 4.1%, which means that the exchange rate has begun to exert pressure on exports.

For other asset prices, CITIC Securities Analysts clearly pointed out that for the stock market, due to the overlapping of exchange rate and stock influencing factors, and the two are affected by the same risk factors, the linkage between exchange rate and stock market has been significantly strengthened since the beginning of 2017.

For the bond market, the relationship between exchange rate and interest rate is quite complex, there are two effects of capital outflow and risk sentiment. Due to Chinas leading position in epidemic prevention and control and resumption of work and production, the pressure of capital outflow is relatively controllable. Therefore, the relationship between exchange rate and interest rate is mainly affected by risk emotion effect, and interest rate rises at the same time of exchange rate appreciation.

In the view of Tan Yaling, President and chief economist of China Foreign Exchange Investment Research Institute, there is no need to worry about the rise of house prices caused by RMB appreciation. She said that the keynote of the central governments regulation on real estate is the house is for living, not for speculation, which is very firm. In the process of fine-tuning and gradual adjustment of real estate, this consensus has basically been reached. The argument of making a fortune out of a house has now been basically removed.

She also said that the current round of RMB appreciation has not stimulated Chinas stock market, and there is no direct relationship between the two. Because the exchange rate is a price trade-off in foreign relations, and the stock market is a basic manifestation of domestic assets and economic fundamentals or enterprise development, and the two focus on totally different things.

Tan Yaling also reminded that the current RMB interest rate spread and exchange rate spread, coupled with the huge Chinese market itself and the credibility of the policy, as well as the sustainability of the economy, has formed a very good understanding of foreign investment, and capital speculation is inevitable. At present, a large number of overseas capital flows into China, we need to guard against the pressure of domestic asset bubbles and prevent related risks.

Peng Wensheng, chief economist and head of the research department of CICC, stressed that after the epidemic subsided, production in other countries would return to normal, and the impact of high exchange rate on exports would be reflected. Further expansion of real estate and related debts would also be unsustainable. In other words, the current exchange rate appreciation is not conducive to the adjustment of economic structure, but also to medium and long-term economic growth.

What is the future of RMB exchange rate?

structurally, were bullish on the renminbi, Gian Plebani, portfolio manager at UBS asset management investment solutions, told China News Agency.

First of all, the dollar has fallen sharply in the past few months, begian noted. This is obviously caused by the Feds interest rate cut, which makes the interest rate gap between China and the United States beneficial to China. Secondly, China has achieved remarkable results in epidemic prevention and control, and Chinas economy has rebounded to the trend growth level. Last but not least, on the one hand, Chinas structural opening up of the financial market, on the other hand, the low investment of overseas investors in China provides favorable conditions for the structural inflow of funds into Chinas onshore assets.

Mingming said that as far as the current trend is concerned, the trend of the RMB is mainly affected by the mutual forces between China and the United States, including the balance of payments perspective, the performance of the US fundamentals, the medium-term weakness of the US dollar cycle and the political disturbance brought about by the US election. The RMB trend may show an overall strong feature.

He further said that in the long run, on the one hand, if the U.S. economy gradually recovers, the RMB exchange rate will still bear certain pressure. On the other hand, from the perspective of double cycle, the current account and capital account still need to maintain overall balance. If RMB is excessively strong, it may bring pressure on current account to a certain extent. Therefore, in the long run, RMB exchange rate may not be excessively strong.

However, due to the central banks withdrawal from the normal intervention on the market through foreign exchange funds, the volatility of RMB exchange rate has increased significantly. Xie Yaxuan pointed out that, on the one hand, in order to improve the market-oriented formation mechanism of exchange rate, on the other hand, in response to pressure from the United States, it is expected that the central bank is unlikely to restart its direct intervention in the market. At present, the rapid appreciation of RMB is a manifestation of increased volatility, which also means that there may be a short-term rapid depreciation in the future.

(source: through train)

(function(){( window.slotbydup=window .slotbydup||[]).push({id:u5811557,container:ssp_ 5811557, async:true }Source: Yuan Yijiao, editor in charge of economic report in the 21st century_ NB14956