Wang He: Why is it difficult for the RMB exchange rate to rise against the US dollar? |. China’s Economy |

November 1,RMBrightDollarThe average equity price was reported at 7.1135 yuan, an increase of 115 basis points. At first glance, the yuan appreciates. In fact, since July, the RMB has been fighting for appreciation (even, in early trading on September 25, the offshore RMB received the 7.0 mark against the US dollar for the first time since May last year).

In addition, in general, at least three factors are usefulRMBrespect First, the central banks of the world’s major economies and the Federal Reserve cut interest rates. Despite repeated pushback, the Federal Reserve announced its first interest rate cut in four years on September 18 and expected another rate cut in November. Second, China has a large trade surplus. According to CCP customs data, from January to September this year, China exported 2.61766 billionDollarimports amounted to US $ 1.928157 billion, with a surplus of US $ 689.503 billion. This shows that China’s ability to earn foreign currency is very strong. Third, the CCP has changed its policies and is increasing economic stimulus. In particular, after September 24, many departments including the central bank, the State Administration of Financial Supervision, the China Securities Regulatory Commission, the National Development and Reform Commission, the Ministry of Finance, the Ministry of Housing and Urban Development- Rural, etc. . all came forward to introduce incentive policies.

But why?RMB to US dollar exchange rateisn’t it great? This article briefly addresses three points.

First, fromChinese EconomyFrom the perspective of the CCP’s fundamentals and international position,RMB to US dollar exchange rateIt would be nice to stop the recession, but a rebound is a luxury.

According to the “2023 Statistical Bulletin of National Economic and Social Development” by the National Bureau of Statistics of the Communist Party of China, the average exchange rate of RMB in 2023 was 7.0467 Yuan per US dollar, a decrease of 4.5% from the previous one. year. In the first half of 2024, devaluation will continue (the closing price of the RMB exchange rate against the US dollar fell from 7.0920 to 7.2659, a depreciation of 2.5%) during this period, if the Central Bank of China had not used countercyclical adjustment factors, the depreciation of the RMB exchange rate against the US dollar would have been even more significant. In other words, the central bank has done its best to stop the recession; in terms of respect, it is more of a last resort.

Note that in the first half of 2024, the RMB exchange rate against the US dollar decreased by 2.5% in the same period, the RMB exchange rate against the CFETS currency basket exchange rate index decreased by 2.7%. From a specific point of view, this shows that the “strategic competition” between China and the United States has greatly affected the exchange rate, and the exchange rate war is inevitable. The exchange rate of RMB against the US dollar is now not just an exchange rate issue or an economic issue, but an operational factor at a strategic level. For the CCP, the rational policy is to keep the exchange rate basically stable (even if it normalizes to “break 7”), rather than revaluing it to “6”.

Second, although China has a large trade surplus, the settlement rate of foreign trade enterprises is very low.

In fact, China has been the world’s largest exporter for many years, with a large surplus (see table below). However, since mid-April 2012, the 18-year compulsory foreign exchange settlement and sale system has finally ended, and companies and individuals can keep their foreign exchange earnings independently. Therefore, whether the accumulation of a trade surplus will support the RMB exchange rate depends on the willingness of foreign trading companies to settle foreign currencies.

China’s total import and export volume and surplus from 2018 to 2023

Source: General Administration of Customs of the Communist Party of China

Let’s look at two data points. (1) From 2019 to 2021, the average settlement rate was 45%, but it dropped to 24% from mid-2022 to July 2024. Mainstream institutions estimate that exports of more than $400 billion to collect in “more” dollars, with an average cost of just under 7.1. (2) From January to September 2024, the cumulative foreign exchange settlement and sales by banks were 11,914 billion yuan and 12,778.6 billion yuan, respectively, with a deficit of 864.6 billion yuan in foreign exchange settlement and sales by banks. The decline in the settlement rate reflects the increase in net foreign exchange assets held by exporters, indicating that exporters are generally bearish on the RMB and delayed foreign exchange settlement .

Therefore, although China’s merchandise trade surplus will be US$823.22 billion in 2023, it will not be able to prevent the RMB exchange rate from falling significantly against the US dollar. In 2024, exporters will still be willing to settle foreign currency, and even if the RMB appreciates, it will be limited.

Morgan Stanley report data shows that in July 2024, the foreign exchange settlement ratio of Chinese exports was at a historical low of only 13.5%. To increase the foreign exchange settlement ratio, the USD/CNY exchange rate may need to fall to 6.9 or 6.8. Morgan Stanley believes that if the tax risk is reduced after the US election, driven by favorable seasonal factors, the RMB exchange rate is expected to rise to close to 7, but considering the structural challenges in balance of payments, the RMB is unlikely to continue to appreciate.

Third, the economic fundamentals of the United States are stronger than those of China, and the CCP’s economic stimulus has fundamentally failed.Chinese EconomyProspects are generally pessimistic

The US economy has deep and serious problems. For example, the total US national debt has surpassed the $35 trillion mark; US real GDP growth in the third quarter was 2.8% quarter-over-quarter, below expectations; and the US election has also increased uncertainty about the future of the United States of America.

However, compared to the United States, China’s economy is worse. China’s current problem is not just that the economic market is shaky, it’s not just that economic stimulus is ineffective (for example, the Shanghai stock index rose 1,000 points in one week and then fell sharply , returning to 3,200 points), and it’s not just that. the Chinese Communist Party authorities can do nothing to save the economy; More importantly, the political situation of the Chinese Communist Party has been in turmoil since the Third Plenary Session of the Central Committee of the Communist Party of China in mid-July. Xi Jinping’s power position has been shaken and internal strife has become more dangerous. China’s economic problems and political problems are overlaid, and a breakdown is possible at any time. Under this situation, how optimistic are people’s expectations for the Chinese economy?

Therefore, although some say that the RMB exchange rate “does not refuse to return to the prefix 6 in the short term,” most institutions believe that the RMB exchange rate will fluctuate in the range of 7.0-7.3. In other words, it has become normal for the RMB exchange rate to exceed 7 against the US dollar.

Decision

Foreign capital inflows have a significant impact on the RMB exchange rate. However, even though foreign investors have continued to buy Chinese government bonds recently, the size of their positions at the end of August 2024 was about 4.6 trillion yuan, which accounted for only 2.7% of holdings total domestic bonds, which was only changed so far +0.3% compared to yesterday. Regarding A shares, according to the CICC report, as of October 23, active financing flows accelerated, while passive financing inflows narrowed significantly. Judging from the inflow of foreign capital, it does not support a greater understanding of the RMB.

Internationalization of RMBIt has a special relationship with the RMB exchange rate. On October 31, a report from the Society for Worldwide Interbank Financial Telecommunications (SWIFT) showed that RMB’s share of global payments fell to 3.61% in September, down 1.08 percentage points from the previous month. ending 10 consecutive months of RMB international payment ratios. . According to data from the International Monetary Fund (IMF), at the end of the second quarter of 2024, the scale of RMB reserves held by the world’s central banks was US$ 245.2 billion, accounting for 2.14%, a decrease of 0.15 percentage points from the end of 2023. Among major reserve currencies On seventh place. RMB internationalization is making difficult progress. The international community has little expectations for the value and strength of the RMB exchange rate.

All this means that the probability of a significant appreciation of the RMB exchange rate against the US dollar is very low.

This article represents only the opinions and statements of the author. : Liu Mingxiang

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