On October 10, the central parity rate of the RMB trading benchmark was 6.7008 yuan per US dollar. After entering 2016, there have been cases of reaching 6.7 yuan in trading, but this is the first time in six years since the end of September 2010 that the middle price has reached more than 6.7 yuan. On October 11, the central parity rate of the RMB against the US dollar fell by 90 points to 6.7098, still maintaining above 6.7.
The market has always regarded the price of RMB 6.7 against the US dollar as a key threshold. Mainly because this year the central bank has given the market a signal to stick to the 6.7 mark. After entering 2016, the RMB in the offshore market once exceeded 1 US dollar to 6.7 yuan, but was immediately pulled back by the market. Another time, it reached 6.7 in onshore market trading, but was quickly pulled back to within 6.7 by the central bank. The market believes that the central bank may have to hold on to the 6.7 mark this year.
However, the two trading days into October show that the 6.7 mark has been easily exceeded, and the central bank will not stick to this mark. This may be a landmark event in the changes in the exchange rate system, or a prelude to the reform of the exchange rate system.
From an objective point of view, the RMB’s breakthrough of 6.7 against the US dollar is due to the market. Before the National Day holiday, the pound crashed, the U.S. dollar strengthened, and the U.S. dollar index rose, forcing the RMB to depreciate against the U.S. dollar. At the same time, after the RMB joins the SDR and takes effect on October 1, the RMB exchange rate formation mechanism requires more or a thorough response to market supply and demand factors, and requires the central bank to try not to interfere with the exchange rate formation. It also requires the central bank not to use administrative means to stick to a certain threshold. After market determinants come into play, the RMB will depreciate as it should. It is the market that has the final say, not the central bank. Otherwise, as an international currency, there is no transparent and open market-oriented formation mechanism. Who dares to reserve and hold this currency? After
joined SDR, it has forced the Central Bank of China to speed up the pace of interest rate marketization reform. This time it will no longer stick to the 6.7 mark, which may indicate that market-oriented exchange rate reforms are likely to be in place soon.
From an objective point of view, sticking to 6.7 not only deviates from and distorts the market, but also consumes too much foreign exchange reserves. At the end of September this year, China's foreign exchange reserves were US$3.16 trillion, a decrease of nearly US$18.8 billion from August. This was the third consecutive month of decline in foreign exchange reserves, and the scale fell to the lowest level since June 2011. At the end of September, China's foreign exchange reserves The decline should be due to the central bank's insistence on 6.70. After joining the SDR, it is neither possible nor necessary to sacrifice too much foreign exchange reserves to stick to an integer threshold where the gains outweigh the losses. At the same time, the central bank has included the currency basket system to examine the RMB exchange rate, instead of just focusing on the price changes of the US dollar.
Will the RMB set another exchange rate in the future, especially the exchange rate against the US dollar, and will the central bank stick to it? The possibility is very small. As expectations for the Federal Reserve to raise interest rates at the end of the year increase, the RMB will continue to depreciate against the US dollar. In fact, the central bank has already released the warning ahead of time as the RMB breaks through the 6.7 mark against the U.S. dollar and continues to depreciate. Before the National Day, Fan Gang, a member of the Central Bank’s Monetary Policy Committee, expressed his stance on the RMB exchange rate twice. The first time he believed that the Federal Reserve entered the interest rate hike channel, the US dollar would continue to appreciate, and the RMB faced greater depreciation pressure, and the RMB should depreciate accordingly; the second time he believed that the entry of a large amount of international hot money would cause the RMB to appreciate , so the RMB should depreciate moderately.
Judging from the domestic situation, this wave of the most stringent real estate market controls in history will cause funds to flow out of the real estate market and enter the foreign exchange market. Among them, the expected depreciation of the RMB will lead to the possibility of buying US dollars. This may become a force that promotes the depreciation of the renminbi.
The depreciation of the RMB will follow a trajectory of small steps, and it is impossible to depreciate significantly. If there is a substantial devaluation, the central bank has sufficient means to stabilize the exchange rate. A foreign exchange reserve of more than 3 trillion US dollars is enough to deal with any exchange rate risk . At the same time, China's economy has shown signs of stabilizing, which is the fundamental basis for the stability of the RMB exchange rate. The exchange rate of the RMB against a basket of currencies will continue to remain basically stable at a reasonable and balanced level.
For the stock market, the RMB is highly correlated with the trends of A shares . The depreciation of the RMB may be accompanied by the decline of A shares.On the one hand, the depreciation of the RMB has triggered a decline in the valuation of local currency assets, resulting in the weakening of financial, real estate and other related sectors, dragging down the overall market; on the other hand, once the expectation of RMB depreciation is formed, it will lead to the outflow of hot money and the liquidity of A-shares. The environment will tighten rapidly. Investors are reminded to pay close attention to the negative impact of RMB depreciation on the stock market.
After the expectation of RMB depreciation is formed, assets will be withdrawn from real estate, especially those funds that have poured into the country from overseas in the early days. They will flow out of China due to the depreciation of the RMB, or they will no longer dare to easily enter the Chinese market. Various effects will boost domestic housing. Asset prices fall. In addition, this round of property market regulation is the most stringent in history. There is a high probability that the property market will weaken, and a decline in housing prices may be a general trend.
For students studying in the United States, the devaluation of the RMB means they have to spend a lot more money overnight. The current sharp decline in the RMB has also caused panic among some parents of international students, and the number of parents going to banks to exchange dollars has increased sharply.
The overseas purchasing market is very hot, because the price of goods purchased from overseas is generally 30%-50% cheaper than the price at domestic counters. This is also the reason why many overseas shopping people choose to go farther away. The depreciation of the renminbi will hit overseas shopping shoppers because they need to pay more renminbi for the same product than before. Recently, overseas purchasing orders have been decreasing.
As a foreign exchange investor, you can consider moderately allocating some US dollar assets or holding some US dollars, as well as allocating overseas including real estate.
