What will be the future direction for the RMB exchange rate to maintain basic stability?

With the weakening of policy spillover effects in developed economies and the increasing implementation of macroeconomic policies in China, the RMB exchange rate continues to rise. Recently, both onshore and offshore RMB exchange rates against the US dollar have risen above 7.2, with cumulative gains of 0.6% and 0.7% from August 1st to 12th, further easing the pressure on the RMB exchange rate.

In recent years, the RMB exchange rate has achieved equilibrium and stability in dynamic changes. Experts say that since the "8.11" exchange rate reform in 2015, the two-way fluctuation of the RMB exchange rate has become the norm, and the exchange rate elasticity has significantly increased, effectively playing a role in regulating the macro economy and the automatic stabilizer of international payments. In the future, as the cyclical difference between domestic and foreign monetary policies tends to converge, the RMB exchange rate is expected to continue to maintain basic stability.

Exchange rate shows strong resilience

Since July 25th, the domestic and foreign RMB exchange rates have continued to rise sharply, both rising back to the 7.10 era. On August 5th, the highest domestic RMB exchange rate (CNY) rose to 7.1120 to 1, and the highest overseas RMB exchange rate (CNH) rose to 7.0836 to 1, both reaching recent highs. The trend of the RMB exchange rate has sparked market discussions.

For the main reason for the significant rebound of the RMB exchange rate in this round, Guan Tao, Chief Economist of Bank of China Securities, believes that on the one hand, the expected increase in interest rate cuts by the Federal Reserve and the weakening of the US dollar index have greatly eased the pressure on non US currencies; At the same time, the reverse liquidation of yen spread trading and the strong rise of the yen have driven the overall popularity of Asian currencies to rebound; On the other hand, domestic policies and reforms have boosted market confidence.

"Recently, China's policies have been steadily increasing. At the executive meeting of the State Council held on July 19, the State Council decided to make an overall arrangement of about 300 billion yuan of ultra long term special treasury bond to support large-scale equipment renewal and consumer goods trade in. On July 19 and 25, the central bank launched a" three consecutive "interest rate cut. The Third Plenary Session of the 20th CPC Central Committee made a major deployment to further comprehensively deepen reform and promote Chinese path to modernization, and a series of reform measures will be implemented in succession, which has improved the market's expectation of China's economic recovery prospects." Guan Tao said.

In recent years, high US dollar interest rates and strong US dollar indices have had significant spillover effects on the world. Since 2022, the cumulative increase in US policy interest rates by 525 basis points has reached a historical high of 5.25% to 5.5%. At present, the US dollar index is around 103, also at a recent high. As a result, non US currencies have generally depreciated since the beginning of this year, but the RMB exchange rate against the US dollar has only depreciated by 1.3%, which is smaller than most major currencies and relatively stable.

Observing the RMB exchange rate not only requires looking at the bilateral exchange rates between China and the United States, but also paying attention to the changes in the RMB exchange rate against a basket of currencies, "said Pang Ming, Chief Economist of JLL Greater China. As of August 9th, the spot exchange rate of RMB against the US dollar was 7.1746, up 2.3% from last year's low point; The China Foreign Exchange Trading System (CFETS) Renminbi Exchange Rate Index was 98.53, up 1.1% from the end of last year. Overall, non US currencies are generally under pressure under the strong US dollar, while the Chinese yuan exchange rate has shown strong resilience.

The direction of market-oriented reform remains unchanged

The People's Bank of China recently released the Report on the Implementation of China's Monetary Policy in the Second Quarter of 2024, which shows that it is necessary to adhere to the managed floating exchange rate system based on market supply and demand and with reference to a basket of currencies, play the decisive role of the market in the formation of exchange rates, take comprehensive measures and stabilize expectations, resolutely correct procyclical behavior, prevent the formation of unilateral consistent expectations and self reinforcement, resolutely prevent the risk of exchange rate overshoot, and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.

It has been 9 years since the "8.11" exchange rate reform in 2015. On August 11, 2015, the People's Bank of China announced to improve the central parity rate quotation mechanism of the RMB against the U.S. dollar. Before the opening of the daily inter-bank foreign exchange market, market makers provided the central parity rate quotation to the China Foreign Exchange Trading Center by referring to the closing exchange rate of the inter-bank foreign exchange market of the previous day, taking into account the supply and demand of foreign exchange and changes in the exchange rate of major international currencies. Subsequently, the People's Bank of China implemented a series of reform measures, including the release of the CFETS RMB exchange rate index, clarification of the central parity rate formation mechanism, increase in the number of basket currencies, and adjustment of the closing price calculation timing, to make the RMB exchange rate formation mechanism more scientific and market-oriented.

Wang Youxin, a senior researcher at the Bank of China Research Institute, stated that currently, the exchange rate of the Chinese yuan against the US dollar more accurately reflects the supply and demand relationship in the foreign exchange market, with two-way fluctuations becoming the norm. The expectation of unilateral appreciation and depreciation has been broken, and the elasticity of the exchange rate has significantly increased. The RMB exchange rate can better reflect changes in economic fundamentals, and its function as an automatic stabilizer for macroeconomic and international balance of payments regulation has been fully utilized. Especially in recent years, facing the complex and ever-changing international situation, the RMB has played a good role in absorbing external shocks and creating conditions for achieving external balance. International investors and business entities have increased their confidence in holding RMB assets, and the RMB's functions as an international safe haven currency, investment and financing currency, and reserve currency continue to strengthen.

In the future, the market-oriented reform of the exchange rate should be steadily promoted on the basis of considering economic resilience, to prevent the exchange rate from amplifying economic fluctuations. Wang Youxin believes that it is necessary to continuously strengthen investor education, stabilize market expectations, guide the establishment of a risk neutral concept, encourage financial institutions to innovate foreign exchange derivative products, and help enterprises effectively hedge exchange rate risks. At the same time, we will continuously improve macro prudential management of cross-border capital flows, strengthen monitoring and management of high-risk areas such as international stock markets, Chinese dollar bonds, cross-border credit, offshore RMB, and non-traditional risks, and dynamically adjust the tool system for different risks.

Industry insiders say that after years of development, the participants in China's foreign exchange market have become more mature, trading behavior has become more rational, market operations have become more resilient, experience in facing market changes has become richer, and the regulatory toolbox has been continuously enriched. The market-oriented direction of the RMB exchange rate reform will not change. China will always adhere to the decisive role of the market in the formation of the exchange rate, maintain the flexibility of the RMB exchange rate, and promote the stable development of the foreign exchange market.

Provide support for economic growth

The economy is the fundamental basis for stable exchange rates, and the trend of exchange rates fundamentally depends on economic fundamentals. Looking ahead to the future, experts believe that from a fundamental perspective, China's economy will continue to improve, and the series of reform measures proposed at the Third Plenary Session of the 20th Central Committee of the Communist Party of China will further stimulate market vitality; From the perspective of the international environment, the European Central Bank and the Bank of England have taken the lead in cutting interest rates, and expectations for the Federal Reserve to cut interest rates are also increasing. The external environment for China to maintain the stability of the RMB exchange rate is improving.

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 is highly certain. Coupled with a variety of exchange rate management tools, the RMB exchange rate is expected to maintain basic stability at a reasonable and balanced level.

In the coming months, it is highly likely that the RMB will continue to appreciate against the US dollar. Wang Youxin believes that the further consolidation of China's economic recovery foundation will provide solid support for the RMB exchange rate. The downward pressure on the US economy will continue to increase, and the US stock market will enter a period of adjustment. The Federal Reserve's policy easing may exceed previous expectations, and the US dollar index and US bond yields will continue to fall. After the Federal Reserve's interest rate meeting in September, the inverted trend of the US China interest rate spread will significantly improve, and the external pressure on the RMB will continue to ease. At the same time, the complexity of the global political and economic situation and the severe fluctuations in financial markets may prompt more international capital to seek "safe havens" globally, and the RMB exchange rate has high stability. The endogenous growth momentum of the Chinese economy continues to strengthen, and it is foreseeable that RMB assets will receive more attention in the current and coming months.

Guan Tao stated that we need to continue consolidating and enhancing the positive trend of economic recovery. At present, China is in a critical period of economic recovery and transformation and upgrading. Only by stabilizing growth and preventing risks can we stabilize expectations and boost confidence. We must attach equal importance to comprehensively deepening reform and opening up and increasing macroeconomic regulation, and continue to promote the effective improvement of the economy in terms of quality and reasonable growth in terms of quantity.

At the same time, actively attract medium and long-term foreign investment inflows. In Guan Tao's view, foreign investors are not worried about the fluctuation of exchange rates, but about the "non tradable" risks that may arise from exchange rate rigidity. On the one hand, we need to effectively stabilize growth, prevent risks, maintain economic operation within a reasonable range, enhance market profitability, and improve the expectations of overseas investors; On the other hand, it is necessary to improve the basic system of the capital market, enhance the quality of listed companies, strengthen investor protection, and promote institutional opening in the financial sector to enhance foreign investors' confidence in the Chinese economy and currency, and attract medium - and long-term capital to develop and operate in China. (Reporter Yao Jin)