On June 15, the central parity of RMB against USD was lowered by 344 points, the largest decline in more than four months, to 6.4306 (1 USD = RMB 6.4306, the same below), which is the lowest level since January 19, 2018. Reuters reports that according to the pricing mechanism, most of the changes in the central price on June 15 reflect the points needed for the overnight exchange rate to remain basically unchanged; the effect of the "counter-cyclical factor" has not yet taken effect. On the morning of June 15, the USD index briefly crossed the 95.0 mark, refreshing the highest level in more than two weeks, and rose 0.1% during the day. During the Dragon Boat Festival holiday, RMB continued to depreciate. By June 18, the offshore RMB exchange rate closed down to 6.4581, and the on-shore RMB exchange rate was reduced to 6.4378.
It is worth noting that the decline in the exchange rate of RMB occurred when China further expanded the liberalization of RMB. On June 14, Pan Gongsheng, the Deputy Governor of the Central Bank and the Administrator of State Administration of Foreign Exchange (SAFE) expressed at the Lujiazui Forum that the liberalization of capital projects will be steadily and orderly promoted, and at the same time more focus will be given to the decisive role of the market in the formation of exchange rates, further enhancing the flexibility of the RMB exchange rate, and maintaining the exchange rate to be fundamentally stable at a reasonable and balanced level. Yi Gang, Governor of the People's Bank of China, spoke on the same day at the same occasion that it is necessary to make overall plans for strategies and initiatives to further expand the liberalization, actively expand the RMB's cross-border use, and steadily increase the convertibility of RMB capital account. Fang Xinghai, the Vice Chairman of the China Securities Regulatory Commission (CSRC), also stated on the same day that there is an apparent trend that international investors are now more inclined toward RMB assets.
Anbound's researchers point out that if the RMB exchange rate continues to fall against the USD, it means that financial policy officials may have certain "bias" in judging the trends in the current market environment. It is believed that the RMB exchange rate inclines towards stability; this creates an environment for the continuous promotion of the opening-up of capital projects. In all actuality, however, the future market situation may not be conducive to the stability of the RMB exchange rate, and the new round of RMB exchange rate decline may have just begun.
In fact, since the beginning of this year, RMB exchange rate against USD has seen some twists and turns. From the beginning of the year to early February, the USD exchange rate against RMB depreciated rapidly from approximately 6.50 to about 6.28, which meant that RMB appreciated about 3.4%; thereafter, until mid-April, RMB's exchange rate continued to fluctuate around the 6.30 level; since late April, the exchange rate of USD against RMB has risen significantly from around 6.28 to about 6.42, which means that the RMB has depreciated by about 2.2%.
At present, there are also optimistic views that from the beginning of the year up to now, the exchange rate of RMB against the CFETS currency basket has continued to appreciate, from about 94.9 earlier this year to a significant rise to approximately 97.3 in early June, an appreciation of about 2.5%. It should be pointed out that the CFETS RMB exchange rate index includes 24 currencies that are highly related to China's trade. Among them, the USD only occupies 22.4%, the euro holds 16.34%, and JPY holds 11.53%. Looking at the current economic situation of the major economies, the contrast between the RMB exchange rate against the US dollar and the CFETS currency basket index shows that compared with the U.S. economy, most of the world's economic recovery is not optimistic. In other words, the weaker economies of the European economy and emerging market countries have caused the weakening of the currencies of the relevant countries; this then resulted in the illusion that the RMB exchange rate remains "strengthened".
According to Anbound's researchers, the trend of economic slowdown shown in China's economic statistics in May is also an important factor affecting market confidence in RMB. The economic statistics in April were not exactly good, and the growth rate of all important economic statistics in May was significantly declining, revealing that the gradual slowdown in the Chinese economy in 2018 has already taken shape. While the National Bureau of Statistics of China can still say that such statistics show stability, yet the market probably can sense that the trend of economic slowdown has clearly formed. Under such trend, the depreciation pressure of RMB against the USD will continue to increase in the future, and it may promote a new round of capital outflow.
Anbound's senior researcher He Jun pointed out that there is another "risk, if the RMB exchange rate is depreciate again, it may pose a certain challenge to the financial liberalization policy that China is promoting. On June 12, the People's Bank of China and the SAFE issued the "Regulations on the Foreign Exchange of Domestic Securities Investment by Qualified Foreign Institutional Investors (QFII)" and the "Notice on Relevant Issues Concerning the Management of Domestic Securities Investment by RMB Qualified Foreign Institutional Investors (RQFII)", which will cancel the limit of 20% of total domestic assets at the end of the previous year in the monthly remittance of QFII funds, as well as abolish the lock-in period requirements for QFII / RQFII principal, and cancel the existing three-month lock-in period for QFII investment and RQFII non-open-end fund investment; this means that foreign institutional investors can remit the funds as needed. At the same time, QFII / RQFII are allowed to make foreign exchange hedging on their domestic investments to hedge their exchange rate risks. According to the person in charge of SAFE, this is a relatively thorough reform; in the future, in addition to the macro-prudential management of the quota, no restrictions will be imposed on the remittance of funds.
While these liberalization measures are necessary for China's financial sector, technically, if this round of liberalization catches up with the devaluation of the RMB, it may cause the implementation of liberalization policy to encounter some issues. Should China continue implementing liberalization measures to allow qualified funds to flow out of China? Or should China modify the liberalization measures under the pressure of the depreciation of the RMB exchange rate?
We believe that the financial decision-making departments still remember the situation in 2015 where China suffered from the devaluation of RMB, the outflow of funds and the sharp decrease in foreign exchange reserves simultaneously.
Final Analysis Conclusion:
Analyzing from multiple factors, the RMB exchange rate may face phased devaluation in the future, which will pose a certain challenge to the implementation of China's financial liberalization policies.
