Why did the RMB depreciate against the US dollar and break “7”?
Liu Guoqiang, deputy governor of the central bank, gave an explanation for the reasons for the current round of decline of the renminbi at a briefing of the State Council Information Office on September 5. He said that the recent adjustment of the U.S. monetary policy has been mainly due to the appreciation of the U.S. dollar. Other reserve currencies in the SDR basket have depreciated significantly against the U.S. dollar. However, compared with other non-U.S. dollar currencies, the depreciation of the RMB is the smallest. In the SDR currency basket, the U.S. dollar has appreciated, and the RMB has also appreciated, but the appreciation of the U.S. dollar is larger than that of the RMB. There has been no overall depreciation of the RMB.
According to the views of comprehensive research institutions, the current round of RMB decline that started on August 15 is not only affected by the strengthening of the US dollar, but also by the deepening divergence of Sino-US monetary policies and the recent pressure on domestic economic growth.
How do you view the RMB exchange rate breaking “7” against the US dollar?
This is the first time since August 2020 that the exchange rate of RMB against the US dollar has exceeded “7”.
However, many institutions pointed out in reports that against the background of a strong US dollar, the key point “7” is no longer so important, and exchange rate fluctuations under the complex and changing international situation should be viewed rationally.
“The current weakening of the RMB exchange rate has overly borne the impact of the Federal Reserve’s high inflation and the European energy crisis. Against the background of a strong US dollar, the RMB may still be under pressure in the short term, but the ‘breakthrough of 7 or not’ of the RMB exchange rate is no longer the key point.” CITIC Securities pointed out.
Regarding the closely watched point “7”, the central bank once gave a “reservoir” metaphor on August 5, 2019 (the first time the RMB spot exchange rate broke through this mark in 11 years), that is, the “RMB exchange rate” Breaking ‘7’, this ‘7’ is not an age, you can’t come back from the past, nor is it a dam. Once it is broken, the water will flood thousands of miles; ‘7’ is more like the water level of the reservoir, which is higher during the flood season. It will drop again during the dry season, and it will rise and fall, which is normal.”
Does the depreciation of the RMB make money less valuable?
Will devaluation lead to rising prices?
In fact, the impact of exchange rate fluctuations is an old topic. There are advantages and disadvantages to exchange rate depreciation. Moderate depreciation will help enhance export trade competitiveness and price advantages and promote the recovery of the real economy, but the import costs of importing companies will increase.
For example, footwear accessories, textiles, clothing, and leather bags account for a large share of China’s export trade. A moderate depreciation of the RMB may benefit companies in these industries. On the other hand, industries that need to import raw materials, goods, and services from overseas, as well as companies carrying more U.S. dollar bonds, may be negatively affected.
But it should be noted that the “worthlessness” of RMB depreciation is only reflected when using RMB to buy US dollars. When import settlement requires US dollars, import costs will indeed increase.
If the import settlement is in euros, yen, or pounds, the cost has actually been decreasing recently because the RMB is actually appreciating relative to these currencies.
As for the issue of rising prices, China’s CPI makes up most of the food and supplies that the country can be self-sufficient in. The depreciation of the RMB exchange rate against the US dollar has little impact on our own internal prices.
Of course, if the product you consume domestically is imported through US dollars, or its parts are purchased in US dollars, then the cost of RMB depreciation may be transferred to the price of the product you want to buy, making it more expensive.
To give the simplest example, if you shop overseas through cross-border e-commerce in China, and your final consumption is denominated in US dollars, it will have an impact on you.
However, China has a pricing mechanism for the supply of many daily necessities. The final price after the pricing mechanism does not necessarily have to be paid by the entire population.
What is the impact on exports?
To what extent can this round of RMB depreciation support export-focused companies?
“In this cycle, China’s economic situation, especially exports, has weakened, and the ‘reservoir’ supporting the RMB is no longer available. The RMB has chosen to depreciate directly with the US dollar index while maintaining stability against the CFETS basket exchange rate. On the one hand, this structure can appropriately Depreciation supports exports, and at the same time, due to maintaining a stable exchange rate basket, there is less pressure on the balance of payments.” CITIC Construction Investment pointed out.
Guolian Securities pointed out that the impact of exchange rates on economic fundamentals is mainly reflected in the foreign trade level. From a trade perspective, the depreciation of the RMB is beneficial to export-oriented enterprises, and their competitive advantages and profitability are expected to be strengthened; while it is more unfavorable for import trade. Judging from the data, the RMB has begun a depreciation cycle since April this year. After excluding the impact of the epidemic, the export situation has improved since May. Exports have maintained positive year-on-year growth, while imports have continued to fluctuate at low levels year-on-year.
It shows that RMB depreciation has a positive correlation with exports and a negative correlation with imports. Analysis of country-by-country data shows that RMB depreciation is one of the factors driving China’s net exports, but net exports are also affected by factors such as domestic economic fundamentals, international trade environment, and demand from importing and exporting countries.
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