No One Understands Why China Wants The Renminbi To Collapse: It Must Be Decoupled From The US Dollar.

As the US Federal Reserve expects to raise interest rates, the US dollar is stronger than most of the world's currencies, and the renminbi is relatively strong. However, China's dependence on foreign trade is two times that of the United States, and the pressure on the Chinese economy to grow is slowing down.

The biggest loser in the US dollar will not be the US, but China.

Because the central bank has generally linked the RMB to the US dollar in recent years to strengthen the country's financial stability.

The Fed's rate hike next week, even if it does not allow a complete stop of foreign exchange intervention, will become a perfect excuse for further reducing the intervention. China is not competing for depreciation, but will allow the RMB exchange rate to fluctuate in line with the corresponding fundamentals.

At present, when the euro appreciates and the US dollar index falls, the Central Bank of China will take the initiative to guide and digest the depreciation pressure before the end of the year. Next week, the Fed will not be too passive after raising interest rates.

As the United States tightens up and China loosens monetary policy, the weakening of the renminbi against the US dollar is the most natural thing in the world, symbolizing the normalization of the renminbi.

The central bank's action timing reflects that the central bank is worried that the US dollar will continue to appreciate against the counterpart's currency, as the renminbi keeps its eye on the US dollar.

To boost the sluggish exports, the yuan needs to depreciate sharply.

According to the estimate, if the other conditions remain unchanged, the depreciation of the RMB by 10% will make the export growth rate back to 10% year-on-year.

The risk is that the depreciation of the renminbi will trigger capital outflow and affect the stability of China's financial system.

Our estimate is that the depreciation of the RMB against the US dollar will trigger a capital outflow of about $40 billion, 1%.

China's plan may be that it has $3 trillion and 600 billion in foreign exchange reserves, a large number of bank deposits exist in the central bank, and controls over cross-border capital flows, and they manage any risk.

China still has more than $3 trillion in foreign exchange reserves, assuming that 10% of the RMB devaluation triggering a $400 billion capital outflow.

The generalized trade weighted index includes 26 currencies, of which five are the Chinese Renminbi (weight coefficient =21%), the euro (16%), the Canadian dollar (13%), the Mexico Peso (12%) and the yen (7%).

In the past year, the strength of the US dollar relative to the above five currencies is as follows: RMB (3%), euro (21%), Canadian dollar (20%), Mexico Peso (25%) and yen (22%).

Therefore, in terms of the impact on US dollar after trade weighted, the depreciation of the renminbi remains the smallest so far.

Nevertheless, it has amplified the already serious problem and may aggravate it if China seeks to achieve a similar market determined depreciation rate for other trading partners.

At present, the linkage between the RMB and the US dollar does not make much sense, because China's exports are declining (because China's wages have risen sharply, and its exports are already less competitive), and the growth rate of GDP is also declining (due to the weakness of China's exports and the debt burden caused by large-scale investment boom), so China is having to lower interest rates.

"The middle price reflects the attitude of the central bank. The Federal Reserve will basically raise its interest rate next week. The central bank will go ahead of the market and release the pressure of depreciation ahead of schedule," said Xia Le, an economist at Spain's external bank in Hongkong.

He believes that after the central bank's accession to the SDR and the goal of "clean floating", the intervention in the market will continue to weaken.

Until next week, the Fed's interest rate hike will not exceed the minimum value of $6.45 in August, which means that the yuan will depreciate by nearly 4% this year.

For China, a more realistic approach is to decouple the renminbi from the US dollar and let the renminbi depreciate against the yen, the euro, the Australian dollar and other major currencies in order to regain competitiveness and thus ease the deflationary effect of a strong exchange rate.

If the RMB and the US dollar really "decouple", it will be a heavy policy move, which will also help the slow growth of China's economy to regain strong upward momentum.

Huang Yuchuan, senior director of the Carnegie World International Peace Foundation, pointed out that this is a problem for China: when the economy is shrinking, the excessive appreciation of the RMB is a bad thing for Bank.

He and former US Treasury Secretary Summers (Lawrence Summers) have all expected that China will try to loosen the link between the renminbi and the US dollar and allow it to depreciate.

Since last year, the US dollar index for tracking the US dollar against a basket of major currencies has risen by more than 20%. At the same time, the US dollar appreciated by only about 3%.

Although the US dollar was hurt by the strong dollar, the US export volume declined by 4.3% in the 1-10 month of this year, but China's dependence on trade was even greater. Foreign trade accounted for 42% of its gross domestic product (GDP), which was much higher than that of the US 23%.

Westpac Strategy Group estimated that the yuan rose nearly 15% against a basket of currencies after trade weighted last year.

But in the face of the rise of Vietnam and Thailand, China's competitiveness is losing because its labor costs are rising.

Goldman Sachs economists in New York use computer simulations to figure out that if the US dollar rises 10% in a short period of time, China's economic growth rate will be lost by almost 1 percentage points.

Jan Hatzius, chief economist of Goldman Sachs, pointed out that China's exposure to trade is even higher, so the same exchange rate fluctuation has a greater impact on its GDP.

Even if China depreciates its currency, it is expected to attract more attacks from the US political circles, accusing it of manipulating the currency to maintain its own advantages, especially in the next US presidential election, which is less than a year away.

But Huang Yuchuan bluntly said that Beijing is in a dilemma. "If they let the renminbi depreciate, they will be attacked", but "they need to do so".