On November 30, the onshore USD/RMB exchange rate opened above the 6.38 mark, while the offshore USD/RMB exchange rate rose in a volatile way. As of 5:35 PM, the onshore and offshore RMB were trading at 6.3708 and 6.3743 against the U.S. dollar, respectively, breaking through 6.38 and approaching the high of 6.36 in late May. On the same day, the central parity rate of RMB against the U.S. dollar rose 78 basis points to 6.3794. After several ups and downs since the beginning of this year, the RMB has been appreciating against the U.S. dollar since the end of September, and there is a trend of accelerated appreciation in the near future. The market noticed that this round of RMB appreciation is different from the past, that is, the RMB exchange rate is forming an "independent market" in the context of a rising U.S. dollar index.
From the perspective of the RMB exchange rate mechanism, the pricing mechanism of RMB calculates the central parity based on a basket of currencies, but due to the influence of the U.S. dollar in the world, the trend of the RMB is more similar to that of the U.S. dollar. This is reflected in the RMB exchange rate against the U.S. dollar in the first nine months of the year. However, since the end of September, the RMB has seen a continued trend of appreciation against the U.S. dollar amidst a rising U.S. dollar index. These new changes will have different implications for the economic and financial markets both at home and abroad in the future.
In the view of researchers at ANBOUND, changes in the RMB exchange rate not only reflect changes in international trade and investment in the post-COVID-19 era, but are also closely related to the development of the pandemic, as well as changes in the international geopolitical situation. As China's currency market gradually matures and the size of the RMB currency pool continues to grow, the trend of RMB's "independent market" this time is more the result of the market's own adjustment, and also reflects that the domestic market is becoming increasingly mature and can still maintain a relatively stable state amid the ups and downs of the global economy.
Since the beginning of this year, as the pandemic continues to spread in different parts of the world, China has enjoyed the "dividend" of its foreign trade growth, thanks to its internal stability and recovery of production, even as the global supply chain has been rather chaotic. China's exports totaled USD 2.7 trillion in the first 10 months of this year, up more than 30% from 2020, data showed. At the same time, with foreign central banks implementing loose monetary policies while China maintains a prudent monetary policy, overseas funds increase their investment in the Chinese market through various channels, which brings a double surplus of trade and capital. This increased international demand for the RMB forms the basis for its appreciation. In addition, as the central bank's policy intervention on the RMB exchange rate is gradually reduced, the RMB exchange rate fluctuations are more "independent" from policies and the market. After several rounds of "two-way fluctuations," companies and currency investors are increasingly aware of the uncertain consequences of one-way bets on the RMB exchange rate, resulting in less speculation in the market. This makes the RMB exchange rate more reflective of current short-term supply and demand changes in the money market, rather than being pressured by expectations of dollar appreciation.
As far as the People's Bank of China (PBoC) is concerned, the appreciation or depreciation of the exchange rate is actually not conducive to the stability and growth of the Chinese economy as the size of the Chinese economy keeps expanding. Therefore, in this case, the PBoC puts more emphasis on the stability of the RMB exchange rate. The PBoC's latest report on the implementation of monetary policy in the third quarter stressed the need to deepen market-oriented reform of the RMB exchange rate, enhance the elasticity of the RMB exchange rate, strengthen expectations management, improve macro-prudential management of cross-border financing, guide market players to adhere to the concept of "risk neutrality" and keep the RMB exchange rate basically stable at an appropriate and balanced level. Under such circumstances, the PBoC pays more attention to changes in market expectations and adheres to the basic attitude of "two-way fluctuations" of the RMB, so it is happy to see the free fluctuation of the RMB exchange rate within a certain range. Once a one-way "fluctuation" is formed, the PBoC will still intervene and hedge against it.
As far as companies are concerned, the willingness of companies to settle foreign exchange is declining amid the continuous appreciation of the RMB, which has led to the growth of foreign currency deposits in banks. Data show that since 2021, foreign currency deposits in financial institutions increased to a trillion U.S. dollars in size, peaking at USD 1.02 trillion at the end of June. This reflects the wait-and-see attitude of foreign trade companies who are reluctant to settle their foreign exchange to avoid losses in the case of RMB appreciation. Of course, this situation is beneficial to the diversification of the exchange rate risk of the PBoC, and to avoid passive currency supply driven by funds outstanding for foreign exchange, which is conducive to the stability of China's money market. For now, the biggest challenge for companies is how to achieve "risk neutrality" after speculation on the RMB has been "stifled" many times.
For the capital market, the fluctuation of the RMB exchange rate and the PBoC's attitude towards "two-way fluctuations" have greatly reduced the possibility of foreign exchange speculation, which is of positive significance to the stability of RMB asset value. From this perspective, a rapid appreciation or depreciation of the RMB exchange rate is not conducive to the stability of capital flows, nor to the stability of China's capital market and economy. As long as China's economy does not experience major fluctuations, remains stable and the RMB exchange rate risks are well controlled, the trend of long-term funds buying RMB assets will continue under the increased "independence" of the Chinese market, so as to realize the diversified allocation of assets.
As for the future trend of the RMB, the stability of the Chinese market has increased the expectation of RMB appreciation under the expectation that the global pandemic will worsen again due to the spread of the new virus strain. On the one hand, the continuation of the pandemic will slow down the recovery process of the global supply chain system, and will still have a periodical "dividend" for the growth of China's foreign trade next year. On the other hand, when the global economic recovery is slowing down due to repeated pandemics, the Fed's interest rate hike is expected to be delayed, which is conducive to maintaining interest rate differentials between China and the United States. From this point of view, the appreciation of the RMB still has a phased trend. However, as mentioned by ANBOUND, while the competition between China and the U.S. remains, the foreign trade environment is still uncertain, and the long-term appreciation of RMB will gradually form pressure on exports. The Fed's policy shift may be delayed, but policy tightening driven by inflation has become a trend, which limits the room for long-term appreciation of the RMB.
In the long run, with the expansion of China's economy and the deepening of its opening-up, one-way exchange rate changes have a weaker driving effect on China's economic growth, while the side effects are increasing. Therefore, it is more meaningful to maintain the stability of the RMB exchange rate when China's economy is turning to "internal circulation". And the stability of the economy is also conducive to maintaining the stability of the RMB exchange rate. Therefore, two-way limited fluctuations of the RMB will still be a long-term trend, as well as the stance of exchange rate policy.
Final analysis conclusion:
The recent "independent market" of the RMB exchange rate reflects the changes in the foreign exchange market and is a "dividend" of China's relatively stable economy. In the long run, maintaining a stable RMB exchange rate will still be an important goal of exchange rate policy, which is also needed for China's economic growth.
