Recently, the RMB has been depreciating against the US dollar. On September 15, the exchange rate of the US dollar against the RMB broke through the psychological threshold of "7", but then the depreciation accelerated and exceeded 7.2 in less than two weeks.
The rapid depreciation of the RMB has also attracted . The People's Bank of China 's intervention in the foreign exchange market. Starting from September 28, the foreign exchange risk reserve ratio of forward foreign exchange sales business has been raised from 0 to 20%, but it did not prevent the breakthrough of 7.2 on the same day.
analysis said that an important reason for the sharp rise of the US dollar was the large-scale tax cuts in the UK, which caused the pound to plummet. On the evening of the 28th, the Bank of England came to rescue the market and announced the temporary purchase of British long-term Treasury bonds. On September 29, the US dollar exchange rate against the RMB returned to 7.15, up more than 1,000 basis points from its lowest point.
It is worth mentioning that the RMB has depreciated against the US dollar, but the depreciation is only half of the appreciation of the dollar index (the weighted average of the exchange rate exchange rate of the six major international currencies) during the same period; the RMB has appreciated significantly against the euro, pound and yen, and is still a relatively strong currency in the international currency market.
"Seven-seven" psychological barrier
For a long time, the RMB exchange rate against the US dollar has had a psychological barrier 'Seven-seven'.
During the subprime mortgage crisis in 2008, the RMB appreciated sharply, and the US dollar against the RMB exchange rate fell from 7.8 to 6.8. The People's Bank of China has stabilized the RMB exchange rate and pegged the US dollar to stabilize the RMB exchange rate at 6.8-6.89.
In 2016, the RMB faced pressure of depreciation, and the central price of the US dollar against the RMB once reached 6.96. The central government of China used a large amount of foreign exchange to stop the exchange rate before the 7 yuan mark.
After that, the market has formed psychological expectations for "Seven-seven" policy, believing that central bank will use policy means to stabilize the exchange rate below this number. Because once this threshold is broken, investors' expectations for the future depreciation of the RMB may be further amplified, and foreign capital will accelerate its withdrawal. At that time, the difficulty of stabilizing the exchange rate will be greatly increased.
On August 5, 2019, affected by the Sino-US trade war at that time, the RMB exchange rate against the US dollar broke through the 7 yuan mark, hitting a new low in more than 11 years.
At that time, the central bank officials came forward to downplay the meaning of "breaking seven", saying that this "7" is not age, it cannot come back in the past, nor is it a dam, and once it is broken through the flood, it will plummet thousands of miles; "7" is more like the water level of a reservoir, is higher during the flood season, and it will fall again during the dry season, and it will rise and fall, which is normal. After
, the RMB appreciated afterwards, reaching 6.3 at one point. The market response was not strong when it "breaks seven" again on September 15 this year, but it fell sharply to 7.2 in less than two weeks, causing more discussion.
Factors affecting the exchange rate
An important factor affecting the exchange rate is the "supply and demand" relationship. As the demand for the RMB increases, its value will increase and it will appreciate. In addition, there are many other factors, including:
Economy: If the economy is strong, the currency will be strong, because other countries need to invest and local currency to achieve it, which will increase demand.
Savings: For example, if the People's Bank of China raises interest rates, , and the interest rate increases, the attractiveness of RMB savings and investment will be increased because the rate of return is higher. In this way, the demand for the RMB will increase. The appreciation of the US dollar this round is due to the Fed rate hike .
Treasury: The account status of the official bank - or how much money you deposit and how much debt you owe - will also affect the exchange rate.
Speculation: Exchange rates are greatly influenced by currency speculators—people who buy and sell currencies based on expectations for future events—. The vast majority of the day-to-day fluctuations of the exchange rate depend on the actions of speculators, or their confidence in a country's economic prospects.
Why did the US dollar rise
Since the RMB depreciated because of the sharp rise of the US dollar, why did the US dollar rise so quickly? Because, , the Federal Reserve has raised interest rates several times in order to control inflation.
After the Fed raises interest rates, it means higher interest returns and financial assets returns, which will lead to international funds from emerging markets flowing back into the US market.
For emerging economies, the outflow of the US dollar will put the country's currency under depreciation pressure, and China is one of them.
But depreciation is not completely unhealthy. For China, a manufacturing powerhouse, depreciation of the RMB is beneficial to China's foreign trade orders. Because for other countries, the depreciation of the RMB means that Chinese goods become cheaper and more competitive, and can attract more orders.
Risks brought by depreciation
For emerging market countries, rapid depreciation of currencies hides huge risks.
For example, during the Federal Reserve's interest rate hike cycle in 1994, currencies in emerging market countries depreciated rapidly, among which Mexico was particularly serious, with a sharp depreciation of the currency, market panic spread, a large amount of capital flowing out of Mexico, and the balance of payments deteriorated, which directly led to a large-scale currency crisis in Mexico.
In September 2018, the US dollar strengthened, which also brought about a wave of depreciation of currencies in emerging markets.
Assistant Professor Hu Rong of the Chinese University of Hong Kong analyzed that the deep reason is that after the 2008 financial crisis, emerging market countries took advantage of the depreciation of the US dollar and borrowed more debts, far exceeding their own ability to bear it. So when the dollar appreciates and interest rates rise, they are unable to repay, resulting in a collapse of the currency and the economy.
As for China, the depreciation of the RMB may stimulate capital outflows or put a lot of pressure on the asset bubble, so China does not want the RMB to depreciate too quickly.
Chuan Securities Chief economist Chen Li also wrote an article to analyze that the depreciation of the RMB will have a wide impact on China's economy and society - firstly, foreign capital may flow out of the Chinese capital market due to intensified exchange rate fluctuations, and secondly, the pressure of depreciation of assets denominated in RMB is increasing, which is not conducive to the long-term development of China's import industry.
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