Multiple factors support the strengthening of the RMB exchange rate

Since last week, amidst severe fluctuations in global financial markets, the Chinese yuan exchange rate has rebounded strongly. At 16:30 on August 5th, the onshore RMB to USD exchange rate closed at 7.1385, up 765 basis points from the previous trading day and over 1192 basis points from a week ago (July 29th); As of August 5th, the offshore RMB exchange rate against the US dollar was 7.1145, and during trading, it briefly broke through the 7.10 mark, rising nearly 600 basis points.

Why is the Renminbi strengthening? Experts say that changes in the external environment leading to changes in expectations and the continued release of domestic policy dividends are the two main reasons for the recent rebound of the RMB exchange rate.

Since July, the external environment has started to change in a direction favorable to the strengthening of the RMB exchange rate, "said Li Liuyang, a foreign exchange research expert at CICC. Currently, the derivatives market has basically priced the Fed's first interest rate cut in September, and the direct impact of the interest rate cut transaction is the decline in US bond yields and the fall of the US dollar. The decline of the US dollar is beneficial for some non US currencies, including the Chinese yuan, to rise, while the decline in US bond yields has improved the interest rate differential between China and the United States. This provides certain support for the RMB exchange rate from multiple dimensions.

Zhou Maohua, a macro researcher at the Financial Market Department of Everbright Bank, analyzed that recently, due to factors such as weak key economic data and cooling inflation data in the United States, the market's expectations for the Federal Reserve to cut interest rates have significantly increased, driving the US dollar index to fall all the way. At the same time, the strong rebound sentiment of the Japanese yen has overflowed, and the severe fluctuations in the European and American stock markets have triggered a demand for capital hedging. Recently, China has increased the implementation of macro policies, and the expectation of economic recovery has strengthened. The market's expectations for the trend of the renminbi and assets are becoming more optimistic.

There are three macro foundations for the rapid rise of the RMB: first, the decline of the US dollar index; second, the intensification of domestic stable growth policies; and third, a new high in trade surplus. In addition, the appreciation of the Japanese yen is one of the triggering factors for the rapid rise of the RMB. "Zhong Zhengsheng, Chief Economist of Ping An Securities, said that since 2023, the exchange rate between the RMB and the Japanese yen has maintained a high correlation, mainly due to both possessing the attributes of low interest currencies in carry trades. Although the width of the interest rate differential between China and the United States is not as wide as that between Japan and the United States, the low volatility of the RMB exchange rate this year has made the RMB's attribute as a carry rate currency not weaker than that of the Japanese yen, so the trend logic of the two is similar.

Wang Youxin, a senior researcher at the Bank of China Research Institute, stated that Asian currencies have strong interconnectivity and are showing a synchronous downward trend. Recently, the Bank of Japan has raised interest rates beyond expectations, causing a divergence in monetary policies between Japan and the United States, and hindering the "carry trade" chain between the two countries. This has led to a rapid return of international speculative funds to Japan, driving the yen to rebound from historical lows. The market's risk appetite for Asian currencies such as the renminbi has also rebounded.

Data shows that while the Chinese yuan continues to strengthen, the Japanese yen has also broken several barriers and reached the key level of rising and breaking. On August 5th, the Japanese yen rose to 141 against the US dollar, reaching a seven month high.

The trend of exchange rates fundamentally depends on economic fundamentals. Experts believe that fundamentally, the strong rebound of the RMB exchange rate reflects the market's positive expectations for the strengthening of the domestic economy. The Third Plenum of the 20th Central Committee of the Communist Party of China has made systematic arrangements for further deepening reforms, emphasizing the construction of a high-level socialist market economy system and the improvement of the institutional mechanisms for promoting high-quality economic development. This has boosted market confidence in China's economic development in the second half of the year.

Wen Bin, Chief Economist of Minsheng Bank, stated that although there is still pressure on the RMB exchange rate, with the implementation of policies such as interest rate cuts in July and the acceleration of fiscal efforts, domestic demand is expected to receive a certain boost, and the continued recovery of external demand has a high degree of certainty. Coupled with a variety of exchange rate management tools, the RMB exchange rate is expected to maintain basic stability at a reasonable equilibrium level, and the RMB exchange rate against the US dollar will fluctuate in both directions between 7.1 yuan and 7.3 yuan for most of the time.

In the coming months, the RMB exchange rate is expected to continue its upward trend. Wang Youxin believes that the complexity of the global political and economic situation and the severe fluctuations in financial markets may prompt more international capital to seek a "safe haven" globally. The RMB exchange rate has high stability, and RMB assets are currently in a low value zone, while the endogenous growth momentum of the Chinese economy continues to strengthen. It can be foreseen that RMB assets will receive more attention in the current and coming months.

Recently, the International Monetary Fund (IMF) released a fourth article consultation report on China, which showed that the IMF expects China's economic growth rate to be 5% for the whole year of 2024 and 4.5% for 2025, both of which are 0.4 percentage points higher than the forecast in April this year. The IMF believes that since 2020, China has been promoting deleveraging in the real estate industry and guiding real estate companies to adapt to the gradually declining demand in the housing market. These measures are essential for achieving sustainable development in the real estate industry. In addition, since 2024, the monetary policies adopted by the People's Bank of China, such as interest rate cuts and lowering the reserve requirement ratio, are worthy of recognition.