Breaking 7.2! Will the RMB continue to decline?

How do changes in the international market affect asset prices? The exchange rate is a sufficiently typical sample.
The significant increase in exchange costs "is a particularly deep feeling among all parties in the market during this period - in June last year, it required about 67000 yuan to exchange 10000 US dollars within China; By June of this year, this number had become approximately 72000 RMB.
This change is clearly reflected in the trend chart of the RMB against the US dollar exchange rate. Looking at the past six months alone, the exchange rate of the Chinese yuan against the US dollar has fluctuated and declined from around "6.75" to below the "7" level on May 17th, and has continued to decline recently. After a short-term appreciation last week, the renminbi has returned to a downward trend against the US dollar this week.
On June 21st, the offshore RMB/USD exchange rate, which reflects international investors' expectations, briefly fell below the 7.20 mark in the intraday trading, marking the first time since the end of November last year. The spot exchange rate of the Chinese yuan against the US dollar also fell, with a drop of over 200 points after opening on June 21st, reaching a low of 7.1987.
Periodic decline of the RMB exchange rate
In addition, the central parity rate of the Chinese yuan has also been depreciated for two consecutive days. On June 21st, the central parity rate of the Chinese yuan against the US dollar was lowered by 199 basis points to 7.1795. The previous trading day's median price was 7.1596, with a 395 basis point decrease on the same day.
Since the beginning of this year, the exchange rate of the Chinese yuan against the US dollar has fallen by nearly 3.5% in the onshore and 4% in the offshore markets, respectively.
Will the RMB exchange rate continue to decline in the second half of the year? In fact, from the two major characteristics of "elasticity" and "resilience", the RMB exchange rate does not have the conditions for a trend downward.
In recent years, the exchange rate of the Chinese yuan against the US dollar has repeatedly broken the "7" mark and quickly regained its "7" mark in the short term, significantly enhancing its elasticity. In April of this year, the Governor of the People's Bank of China, Yi Gang, stated that in the past five years, the exchange rate of the RMB against the US dollar has "broken 7" three times. The first time was in August 2019, the second time was in February 2020, and the third time was in September last year. The first two times it took 5 months to return to below the "7" level, and last year it took 3 months.
Moreover, China's foreign exchange market has resumed stable operation after experiencing periodic fluctuations caused by external shocks. Since 2017, in the face of three rounds of shocks such as economic and trade frictions between China and the United States, global spread of the epidemic, and unconventional monetary policy adjustments by the Federal Reserve, exchange rates have fluctuated in both directions and become more resilient. The role of market-oriented regulation has been played more effectively, and experience in macro prudential management has also been enriched.
From the perspective of resilience, the RMB exchange rate maintains relative price stability while enhancing elasticity, playing a price role in regulating the balance of international payments and providing overall and orderly exchange rate conditions for foreign trade and investment.

Currently, although the exchange rate of the RMB against the US dollar has gradually declined, the performance of the RMB is relatively stable compared to major global currencies. Data shows that in May, the exchange rate of the Chinese yuan against the US dollar fell by about 2.2%, but it was smaller than the depreciation of the euro against the US dollar (about 2.7%) and the depreciation of the Japanese yen against the US dollar (about 3.2%). From 2018 to 2023, the exchange rate of the Chinese yuan against the US dollar decreased by about 10%, but the CFETS RMB exchange rate index actually appreciated by about 3%, maintaining basic stability within 5 years.

Why does it continue to decline?
Since the beginning of this year, the exchange rate of the Chinese yuan against the US dollar has fallen by 4.33% in onshore and 4% in offshore markets, respectively.
The exchange rate of the Chinese yuan against the US dollar, which has exceeded 7, has always been considered an important indicator. In the past five years, the Chinese yuan has "broken 7" three times. Although the Chinese yuan is also one of the five major currencies in the Special Drawing Rights (SDR) basket, the US dollar remains the strongest one in the basket.
In fact, exchange rate fluctuations are influenced by multiple factors. At present, in the post pandemic era, the world economy is experiencing sluggish growth, and the domestic economy is recovering well. However, market demand is still insufficient, and some structural issues are prominent. In addition, the impact of the Federal Reserve policy is all the reasons for the pressure on the People's Currency exchange rate.
The central parity rate of the Chinese yuan against the US dollar. Image from the official website of the People's Bank of China
Wu Dan, a researcher at the Bank of China Research Institute, said to the Daily Economic News earlier that "the recent short-term rebound of the U.S. Dollar Index, the upside down spread between China and the United States, coupled with the interest rate cut policy of the People's Bank of China, the market's expectation of the polarization trend of China US monetary policy has risen, and the volatility of investor sentiment has increased, leading to the short-term depreciation of the RMB exchange rate."
From the perspective of the recent overall trend, Chang Ran, a senior researcher of Zhixin Investment Research Institute, also pointed out in an interview with the Daily Economic News that the rebound and strength of the U.S. Dollar Index is the key external factor causing the pressure on the RMB exchange rate, while the main reason for the strength of the U.S. Dollar Index is the support of debt crisis risk aversion and the weakening of monetary policy shift expectations.
Chang Ran further analyzed that the supply and demand relationship of foreign exchange is often an important market factor in the periodic fluctuations of the RMB exchange rate. The difference between the payment and purchase exchange rate and the collection and settlement rate has expanded from 4.4% in December last year to 11.7% in March. From January to April, the exchange rates for foreign exchange payments and purchases recorded 59%, 59.5%, 59.4%, and 63.2% respectively, far higher than the monthly average of 54% last year, especially the highest exchange rate of 63.2% since 2021 in April. Since April, the performance of the domestic economy has been weaker than expected, and the support for the RMB exchange rate has basically decreased.
Observing the trends of various global currencies, Chang Ran pointed out that although the RMB depreciates significantly against the US dollar in stages, the value of the RMB is relatively stable within the major global currencies.
However, the short-term impact of the RMB decline is also visible to the naked eye. According to Chao News, Zhou Maohua, a macro researcher at the Financial Market Department of Everbright Bank, told reporters, "The depreciation of the RMB has a 'double-edged' impact on China, helping to boost some enterprises' foreign trade exports, but it may also increase the import costs of some enterprises, and may cause disturbances to cross-border capital flows
Tan Yaling, president of the China Foreign Exchange Investment Research Institute, believes that "sustained depreciation will be detrimental to the stability and recovery of economic confidence." In May, China's manufacturing Purchasing Managers'Index (PMI) was 48.8%, running below 50% for two consecutive months, and the recent import and export data are not strong. At this time, the devaluation of the people's currency will increase the pressure on the recovery of foreign trade imports and exports.
Foreign trade enterprises that have been fluctuating in the "commercial sea" for a long time have their own ways to cope with exchange rate fluctuations, the most typical of which is to lock in the exchange rate and adopt more secure payment methods. For example, prepaid full payment, letter of credit, etc., try to reduce orders of forward collection type as much as possible. The company will also have corresponding policies, such as bank lock up, bill purchase, letter of credit, or Forfaiting, which is to lock some gains and avoid risks at the current exchange rate.
How do families who need to exchange RMB for foreign currency to use abroad cope with exchange rate fluctuations? Ms. Xu, who has a child at home who is about to study in the United States, introduced her method of resisting the decline in the exchange rate to the reporter - buying US dollar deposits. This is also a common operation. At the beginning of this year, I purchased US dollars at an exchange rate of around 6.8. Some of them bought US dollar time deposits, while others were in demand. Currently, the US dollar exchange rate is around 7.1. In the past six months, I have earned both interest and exchange rate difference. "Ms. Xu said, running to four major banks and two local banks at the end of May, and buying another US dollar time deposit before the interest rate reached its peak. Recently, the fixed deposit of US dollars has indeed become popular.