The outbreak of the Russia-Ukraine conflict has engulfed the global market. The world’s major stock markets and various currencies from the euro to the Korean won have plummeted. However, the RMB has become a new safe-haven currency due to its outstanding elasticity.
On February 24, the RMB exchange rate maintained its recent strength. The onshore RMB exchange rate against the U.S. dollar hit a daily high of 6.3100 yuan per U.S. dollar, setting a new high since April 25, 2018; the offshore RMB exchange rate reached a maximum of 6.3072 yuan per U.S. dollar. The yuan hit a new high since April 30, 2018.
“The yuan has been trading like a safe-haven currency during the Ukraine crisis,” said Khoon Goh, head of Asia research at ANZ Banking Group.
One obvious manifestation is that even though the Fed’s monetary tightening expectations have been intensifying since the second half of last year and the US dollar index has gradually risen, the RMB exchange rate has repeatedly strengthened independently against the trend; recent geopolitical conflicts have continued to ferment, and safe-haven funds have allocated RMB The demand for assets has increased, and the exchange rate of RMB against the US dollar has continued to remain stable in the range of 6.3-6.4. Since the beginning of 2022, the RMB has continued its strength since the second half of last year, and its exchange rate against the US dollar has continued to rise.
According to the Industrial Research macro team, due to the trade surplus in recent years, Chinese domestic companies hold a large amount of foreign exchange earnings. This makes the RMB somewhat insulated from external risks. One bright spot is that China’s sovereign bonds attracted a record 575.6 billion yuan ($91 billion) in inflows last year, with foreign holdings of yuan-denominated bonds rising for 38 consecutive months.
“In the short term, the ‘safe haven’ attribute of RMB assets will support the continued strength of the exchange rate, and the RMB exchange rate against the US dollar is expected to hit the 6.30 mark.” Industrial Securities research report shows.
strong growth
Since the second half of last year, under the influence of expectations of the Federal Reserve raising interest rates, the domestic foreign exchange market has experienced a wave of independent trends in which the US dollar is stronger and the RMB is stronger.
In October of that year, the RMB rose above the 6.4 mark. Even with multiple domestic reserve requirement ratio and interest rate cuts and the continued narrowing of Sino-US interest rate differentials, the RMB exchange rate remained strong.
According to Zhang Meng, a macroeconomic and foreign exchange strategist at Barclays, this is due to the surge in foreign exchange settlement and sales surplus brought about by the growth in goods trade surplus and direct investment surplus since last year.
“China’s exports are extremely strong, and if you want to short the RMB now, the gains outweigh the losses. According to the current carry level, the RMB must fall by 2.9% within a year to cover the cost of shorting.” Zhang Meng said.
In addition, it is also very important for RMB assets to attract foreign capital inflows that continue to exceed market expectations.
Although the Federal Reserve has repeatedly stated that it expects to raise interest rates, the market has a certain degree of doubt as to whether it can actually deliver.
“Looking at the whole year of 2022, we expect that the Fed’s interest rate hikes may not be as strong as expected, and the U.S. dollar index will return to the downward channel and test 90 during the year. As the U.S. dollar turns downward, China’s economic fundamentals are relatively strong, and the RMB exchange rate will remain lower. It is judged that the price will appreciate to 6.1 in half a year.” said Li Chao, chief economist of Zheshang Securities.
It is worth noting that currently, my country’s foreign holdings of RMB bonds have increased for 38 consecutive months.
Data released by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) shows that in January this year, the global payment ranking of RMB maintained its fourth place in the world, with its proportion rising to 3.20% from 2.70% in December last year, setting a record high. The further increase in the proportion of RMB in global payments is basically consistent with China’s high foreign trade prosperity and the continuous inflow of foreign capital attracted by RMB assets.
The latest data released by CCDC also shows that at the end of January 2022, the face value of bonds held by overseas institutions in CCDC increased by 50.071 billion yuan to 3.73 trillion yuan, which has been rising for 38 consecutive months. Among them, the amount of treasury bonds under custody by overseas institutions increased by 65.7 billion yuan, and the cumulative holdings of treasury bonds were 2.52 trillion yuan.
Foreign institutional investors also became more active in China’s bond market in January. Foreign institutional investors completed a total of 1,425.1 billion yuan in spot bond transactions, a month-on-month increase of 53%.
Businesses under pressure
However, for foreign trade companies, the appreciation of the RMB is not good news. Especially due to factors such as rising raw material prices, increased labor costs, and skyrocketing shipping costs, the pressure on small and medium-sized foreign trade companies has not diminished but increased.
“When we collected foreign exchange, the exchange rate of RMB against the U.S. dollar was still 6.35. If we sell it now, we will lose tens of thousands. Our profit is already very meager. But if we don’t sell, it won’t work even if we have a lot of money in our hands.” A foreign trade company in Wuxi The person in charge told a reporter from China Times. In fact, in 2021, foreign trade companies are facing problems such as skyrocketing international commodity prices, “sky-high” shipping containers that are hard to find, and short-term domestic power cuts, which have affected the normal operations of some foreign trade factories.
The appreciation of the RMB against the US dollar has become the last straw for many small companies.
For large enterprises, the situation is much better. The person in charge of a shipyard in Wuxi said that fluctuations in the RMB exchange rate directly affect corporate profits, so they generally do not settle foreign exchange in real time. Instead, they lock the foreign exchange for large orders and store the U.S. dollars received for small orders in the bank until the exchange rate stabilizes and improves. Settlement of foreign exchange at that time.
However, when talking about China’s foreign trade situation, Ren Hongbin, Vice Minister of Commerce of China,He expressed his position at the time that foreign trade has reached a “high slope” in 2021. The achievements are hard-won. The situation faced this year is still complex and severe, and it is likely to have to go through a “big hurdle”.
“In 2022, Chinese foreign trade companies that have reached the ‘high slope’ will also face unprecedented pressure.” said Guo Lei, chief economist of GF Securities.
According to predictions, this year, China’s foreign trade development will face increasing uncertainties, instability and imbalances. Risks such as the recurrence of global epidemics, rising commodity prices, energy shortages, and shipping tensions that existed last year still exist. At the same time, domestic economic development is also facing the triple pressure of shrinking demand, supply shocks, and weakening expectations. As well as the high foreign trade base last year, both This will put pressure on foreign trade this year.
In this regard, on the 24th, Ministry of Commerce spokesperson Gao Feng said at a regular press conference that in recent years, the two-way fluctuations of the RMB exchange rate have increased, and exchange rate changes have a multi-dimensional impact on the production and operation of foreign economic and trade enterprises, which is related to bargaining power and costs. benefits and many other aspects. In the next step, the Ministry of Commerce will continue to work with relevant departments to further promote financial institutions to enrich and improve hedging businesses, while optimizing the RMB cross-border trade settlement environment, helping enterprises better adapt to the normal two-way fluctuations of the RMB exchange rate, and continuously improve their ability to resist risks.
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