After the Federal Reserve raised interest rates and reduced its balance sheet, the RMB continued its decline against the US dollar. On May 6, the spot exchange rate of RMB against the US dollar opened at 6.6650, then fell below the 6.67, 6.68 and 6.69 levels, and approached the 6.70 level. It once fell by more than 700 basis points from the previous trading day, once again setting a record high since November 2020. New low. Since the beginning of this year, the spot exchange rate of RMB against the US dollar has fallen by more than 5%.
The offshore RMB exchange rate against the US dollar, which more reflects the expectations of international investors, also fell. On May 6, it fell below the 6.69, 6.70, 6.71, 6.72 and 6.73 levels successively, falling more than 500 points from the previous trading day. Since the beginning of this year, the offshore RMB exchange rate against the US dollar has fallen by more than 5.7%.
The depreciation of the RMB against the U.S. dollar that day was not unrelated to the rapid strengthening of the U.S. dollar index. On the same day, the U.S. dollar index once stood at 104, the first time since December 2002.
Some foreign trade companies said that they had already settled foreign exchange in batches around 6.3, but they did not expect that the exchange rate of RMB against the US dollar would quickly rise to 6.7 later. With the rapid depreciation of the RMB exchange rate against the U.S. dollar, more and more foreign trade companies have begun to settle foreign exchange on the rise. After hovering around 6.7 for a period of time, the RMB exchange rate against the U.S. dollar has recently begun a rapid depreciation trend again.
In fact, since April 19 this year, the RMB exchange rate has depreciated rapidly, falling below multiple levels continuously, falling by more than 3,000 basis points in half a month. Given that the exchange rate of RMB against the U.S. dollar dropped to around 7.1 two years ago, the current RMB exchange rate level remains relatively stable.
In response to the recent trend of the RMB exchange rate, Huatai Securities believes that with the recent rapid spread of the domestic epidemic, prevention and control measures have changed more rapidly, covered wider areas, and become more uncontrollable, which may cause the impact of this round of epidemic on the economy to last longer and the recovery to be longer. slow, leading to a significant downward revision of growth expectations. Secondly, since April, the Federal Reserve has once again increased its “hawkish” statement on the outlook for monetary policy, pushing up the dollar. This has also intensified the “opportunity cost” of holding the renminbi.
Pacific Securities stated that the recent rapid depreciation of the RMB exchange rate was due to internal factors such as the domestic economic downturn and external factors such as the Federal Reserve’s unexpected tightening. The epidemic has rebounded in China since March. The rapid spread and low toxicity of the Omicron virus have reduced China’s comparative advantage in epidemic prevention, and industrial production and supply chains have also been affected. The logic supporting the exchange rate has been impacted, leading to the recent sharp depreciation of the RMB.
Export-oriented enterprises benefit significantly
Although the exchange rate adjustment has had an impact on the market, from an industry level, export-oriented enterprises with large overseas businesses will be conducive to improving export competitiveness in the context of RMB depreciation. That is, through exchange rate changes, revenue is boosted and performance is revised, mainly including textiles and clothing, home appliances, machinery and equipment, electronics, communications, etc.
Many companies said that the devaluation of the RMB will have a positive impact on the company. Some companies said that the depreciation of the RMB is beneficial to the export business, and the company’s foreign trade business is also expected to benefit from this. Some companies said that the company’s export settlement is mainly in US dollars. The depreciation of the RMB can reduce the company’s exchange profits and losses, which will have a certain positive impact on the company’s export business. However, there is uncertainty in exchange rate changes, and the company will continue to pay attention to exchange rate fluctuations.
At the same time, with the rapid correction of the RMB exchange rate, export companies’ willingness to settle foreign exchange has increased significantly. According to data released by the State Administration of Foreign Exchange, in the first quarter of 2022, in dollar terms, banks settled US$660.3 billion in foreign exchange, sold US$601.5 billion in foreign exchange, and had a surplus of US$58.7 billion in foreign exchange settlement and sales.
Wang Chunying, deputy director and spokesperson of the State Administration of Foreign Exchange, said that the current foreign exchange deposits of domestic entities are more than 700 billion US dollars, which is also a historical high. Enterprises usually choose opportunities to settle foreign exchange. The rational trading behavior of “settling foreign exchange at high prices and purchasing foreign exchange at low prices” can effectively stabilize some exchange rate adjustments and contribute to the overall stability of the RMB exchange rate and the smooth operation of the foreign exchange market.
When will the RMB exchange rate stabilize?
There is still depreciation pressure but the extent is controllable
Affected by internal and external factors such as pressure on exports and shrinking or even inversion of interest rates between China and the United States, the RMB exchange rate is still under pressure to further depreciate in the short term. However, with the increasing flexibility of the RMB exchange rate in recent years, the current foreign exchange market sentiment is relatively stable, and most institutions believe that the probability of a substantial depreciation of the RMB exchange rate is low.
Wang Tao, head of Asian economic research and chief China economist at UBS, believes that “the RMB is expected to weaken further against the US dollar in the next few months, reaching 6.9 by the end of the year. As the US dollar has maintained strong momentum recently and China’s exports and economy have weakened, the RMB The dollar may break through the 7 mark in the middle of the year, but should return to within 7 by the end of the year.”
Despite the recent rapid depreciation of the RMB exchange rate, the central bank has shown no obvious signs of “taking action” to stabilize the exchange rate, except for announcing on April 25 that it would lower the foreign exchange deposit reserve ratio of financial institutions by 1 percentage point. It can be seen that exchange rate changes are mainly determined by market supply and demand. On May 6, the central parity rate of RMB against the US dollar dropped by 660 points from the previous day, reaching the lowest level since November 5, 2020.
Northeast Securities Research Report believes that the space for RMB depreciation may be limited. First, after the United States intensively raises interest rates and shrinks its balance sheet in the second quarter, the U.S. dollar index is expected to gradually weaken; second, with the implementation of domestic stabilizing growth policies, the economy is expected to gradually improve in the second quarter, and the economic growth rate in the second half of the year It is expected to rebound slightly; in addition, if the RMB exchange rate continues to depreciate rapidly and significantly, the central bank may continue to introduce relevant policy intervention.
Pacific Securities believes that although the current depreciation trend of the RMB exchange rate is obvious, the current depreciation cycle will be relatively short. On the one hand, pressure to depreciate the RMB has emerged since the middle of last year, but the relative advantages of epidemic prevention and control and the corresponding advantages of industrial production and supply chains have prolonged the appreciation cycle and compressed the depreciation cycle. On the other hand, the U.S. economy this time around is weaker than in previous periods when the U.S. dollar was strong. The Fed’s extremely hawkish attitude may gradually ease or even change after the third quarter. That is, the relatively strong state of the U.S. economy and monetary policy is expected to last only about half a year.
A policy research article released by the central bank on May 6 stated that my country has formed a structural monetary policy system suitable for national conditions. The next step will be to continue to give full play to the dual functions of monetary policy tools in terms of total volume and structure, continuously summarize and optimize the structural monetary policy system, grasp the total amount of liquidity provided by structural monetary tools, and implement various structural monetary policy measures. Monetary policy, fiscal policy, and industrial policy should cooperate to jointly boost the confidence of market entities, stimulate market growth momentum, better assist the development of the real economy, and achieve the goal of stable growth.
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