Will The RMB Exchange Rate Continue Downward In The New Normal?

Since March, the RMB exchange rate against the US dollar or the middle price has been falling continuously.

In February, the RMB exchange rate fluctuated almost daily in the vicinity of the limit price.

During the two sessions of the whole country, the RMB exchange rate seems to be somewhat unexpected.

Because although China's economic data are not strong at present, it does not support the frequent fall of the spot exchange rate.

More importantly, this year's China's economy has entered a new normal. Premier Li Keqiang pointed out in his government work report that the RMB exchange rate should be kept at a reasonable and balanced level and that the exchange rate of RMB should be fluctuated in two directions.

Then, how should the RMB exchange rate be in the new normal and how big the two-way floating elasticity will be?

Last year, the central parity of RMB against the US dollar decreased by 0.36%, showing a slight depreciation.

However, the spot exchange rate of RMB against the US dollar has experienced depreciation in the first half of the year (from the beginning of January to the beginning of June), the appreciation in the middle of the year (from June to mid November) and the depreciation at the end of the year (November to the end of December). The fluctuation of the exchange rate has increased significantly, and the first annual decline in five years has fallen by 2.5%.

In addition, the volatility of the RMB exchange rate increased significantly over the past year, confirming the fact that the RMB exchange rate has approached the equilibrium level. The unilateral appreciation has indeed become a history. This also reflects that the market exchange rate is expected to be differentiated and the fluctuation of the RMB exchange rate is rising.

But, in the two month of 2015, the depreciation rate of RMB against the US dollar has reached nearly 1%.

The continued depreciation of the renminbi has triggered the public's expectation of long-term depreciation of the RMB exchange rate, which may be very unfavorable to the reform of the RMB exchange rate, the internationalization of the RMB and the calm response of China's economy to deflation.

Referring to the reasons for the continued depreciation of the RMB exchange rate, the primary factor is that the Fed's interest rate rise is expected to rise, and the US economic recovery and even the potential for economic growth remain strong, the employment market improves, and core inflation is better than market expectations.

As of February 26th, the US dollar index continued to rise eight months to 94.51, up 17.5% over June 1st last year.

Secondly, in order to maintain steady growth and prevent deflation, the central bank's interest rate cut and reduction are expected to increase in the near future. The spread between the RMB and the US dollar is therefore considered to be further narrowed, and the liquidity of the RMB market will be further relaxed.

More importantly, one of the backstage drivers of the renminbi's spot exchange rate after the Spring Festival is close to trading.

It can be said that the biggest source of profit in exchange trading is the arbitrage of different quotations from inside and outside the renminbi.

There have been two quotations in the RMB exchange rate market: first, the spot exchange rate quoted in the domestic onshore market; the fluctuation range is limited by the central parity of the US dollar / RMB released daily by the central bank; two is the offshore renminbi in the Hongkong non deliverable forward foreign exchange (NDF) market.

The quotation reflects the views of overseas institutions on the future trend of the RMB exchange rate.

As the RMB exchange rate tends to depreciate this year, the RMB exchange rate quoted in offshore offshore markets is much lower than that in the domestic onshore market, thus stimulating the tide of foreign exchange trading. Many enterprises and investment institutions first buy foreign exchange (buying US dollars to sell renminbi) in the territory, and then sell the foreign exchange (buying RMB to sell US dollars) to acquire the price difference between RMB and foreign exchange.

As the RMB devaluation is expected to increase during the Spring Festival, the exchange trading is becoming more and more intense.

What is more, some investment institutions are deliberately creating a market climate of RMB "spot down" through exchange trading. They intend to gamble the Central Bank of China or further relax the fluctuation range of RMB exchange rate in the two quarter.

It is also betting that the Central Bank of China is forced to abandon the RMB exchange rate against the US dollar during the year.

These exchange rate speculation will trigger a greater fluctuation in the RMB exchange rate and gain a more substantial exchange rate return.

It can be seen that the future trend of the RMB exchange rate depends on whether the international economic environment, especially the strength of the US dollar, can continue, and depends on the trend of the domestic economy, and also depends on the policy orientation of the RMB exchange rate.

In terms of the current strength of the US dollar, according to historical experience, the appreciation of the US dollar usually has some inertia, but the inertia will last for a half year or three quarters, and there will be a certain degree of adjustment.

This means that the two - degree rise in the dollar is not very much.

On the other hand, considering that the US dollar is the core of the current international monetary system, the long-term operation mechanism of the US dollar is the "DO/DO mechanism", that is, the long-term depreciation trend is endogenous and stable. The two threshold variables, namely globalization and crisis, have decided that the US dollar will change from a long-term depreciation state to a medium and short term appreciation state.

With the advance of globalization, the easing of the crisis, the opening of the dollar depreciation mode, the slowing down of globalization and the deterioration of the crisis, the US dollar devaluation mode has been closed, and the medium and short-term appreciation has begun.

In line with the historical trend of the US dollar and the "DO/DO mechanism", at present, geopolitics does not have any major events such as local wars, and there is no economic crisis in Europe. Although the inertia of the US dollar may continue for another one or two quarters, the duration of the strong US dollar may be shorter than that expected by the market.

Look at China, though the first two months of this year

Highlighting the pressure on China's economy is still not small, but with the deepening of reform into the "deep water area", the gradual implementation of policies, quality and efficiency of the concept of deepening, China's economy will continue to maintain a stable development this year, to maintain economic growth of about 7% should not be a problem.

In the medium to long term, China's structural adjustment and pformation are gradually in place. The "one belt and one way" strategy and further strengthening of foreign economic cooperation will continue to support the long-term trend of the RMB exchange rate.

As for the RMB exchange rate policy, it has been suggested that the RMB should continue to depreciate.

To cope with deflation pressure, I think it is wrong.

Just imagine that when the RMB is accelerating internationalization, the sharp drop in the value of the RMB will lead to the flow of assets, which will threaten China's fragile financial system and finally interfere with the realization of the international goal of the RMB. Therefore, the government's work report that "maintaining the RMB exchange rate at a reasonable equilibrium level and enhancing the two-way floating elasticity of exchange rate" is the most stable exchange rate policy this year. Not only that, I believe that we need to steadily realize RMB capital account convertibility, expand the international use of RMB, accelerate the construction of RMB cross-border payment system, gradually reduce the normal intervention in the foreign exchange market, and better play the role of the market in the decision of the exchange rate.

Overall, the RMB exchange rate trend under the new normal will continue to be dominated by two-way volatility and will not continue to depreciate significantly.

The author therefore hopes that the market players should analyze and judge the RMB exchange rate, and gradually reduce the policy color and focus more on market factors.

According to their own business operation, we should reasonably arrange the structure of assets and liabilities, properly use risk hedging tools to hedge the risk of uncertainty and take the initiative to adapt to the new normal situation of cross-border capital flows and two-way fluctuation of the RMB exchange rate.