The U.S. dollar is going to raise interest rates , the RMB has cut interest rates, and the central bank has also increased the foreign exchange deposits reserve ratio. According to traditional monetary theory, the RMB will definitely depreciate against the US dollar, and even the central bank is reminding the public to be mentally prepared for RMB depreciation. But recently, many people have posted articles on self-media to express doubts: Why has the RMB not only not depreciated, but instead risen rapidly?
Yes, the RMB has been appreciating since the New Year. As of January 26, the central parity rate of RMB against the US dollar has been reported at 6.3246 yuan, an increase of 172 basis points from the previous trading day of 6.3418 yuan, an appreciation of 0.28%. It was increased by 511 basis points from 6.3757 yuan on December 31, 2021 at the end of last year, an appreciation of 0.81%.
Why is the U.S. dollar raising interest rates? The RMB has cut interest rates, and the central bank has also raised the foreign exchange deposit reserve ratio, but the RMB is still appreciating against the U.S. dollar?
The monetary and financial field may seem confusing and elusive on the surface, but in fact there is a strict underlying logic behind it. Only when we delve deeper into this level will the evolution path of events become clear.
The exchange rate of the RMB and the US dollar involves many factors. But to explain it with the simplest concept, so many complex factors actually boil down to one core issue, which is the relationship between currency supply and demand. Between the US dollar and the RMB, do we need more RMB or US dollars? Of course, more or less is a relative concept. Let's follow this logic and figure out why the U.S. dollar is raising interest rates, the RMB has cut interest rates, and the central bank has also increased the foreign exchange deposit reserve ratio, but the RMB is still appreciating against the U.S. dollar?
First, China’s foreign trade exports are strong, and buying more Chinese goods means increased demand for RMB.
Due to the recurring epidemics, the epidemics in most countries have seriously interfered with normal economic activities, leading to unstable production and insufficient supply capacity in various places. And we have done a better job in controlling the epidemic, which has led to a surge in export orders. In 2021, my country's exports will reach 21.73 trillion yuan, a year-on-year increase of 21.2%. Take a look at the chart below. Basically, exports are increasing month-on-month every month.
Looking at Sino-US trade, our exports to the United States in 2021 were 3.72 trillion yuan, while imports were only 1.16 trillion yuan. As you can see, from a trade perspective, the United States’ demand for RMB is 3.72 trillion yuan, and China’s demand for U.S. dollars is 1.16 trillion yuan. The U.S.’s demand for RMB is 3.2 times China’s demand for U.S. dollars. From a global perspective, in 2021 our exports will be 21.73 trillion yuan and our imports will be 17.36 trillion yuan. The demand for RMB is 21.73 trillion yuan, while our demand for foreign exchange is only 17.36 trillion yuan. The global demand for RMB is 25.18% more than China's demand for foreign currencies. Because the global demand for RMB is greater than China's demand for U.S. dollars, the RMB will of course appreciate. In January, the pattern of stronger demand for the RMB than the U.S. dollar remained unchanged, and the appreciation of course continued.
Second, there is a interest rate difference between the RMB and the US dollar, resulting in a strong purchase demand for RMB-denominated assets in the US dollar.
html On January 19, the United Nations Conference on Trade and Development, headquartered in Geneva, released the "Global Investment Trends Monitoring Report". The report pointed out that global foreign direct investment rebounded strongly in 2021, with a valuation of US$1.65 trillion, an increase of 77% from US$929 billion in 2020. Foreign direct investment flowing into China reached a record $179 billion in 2021, an increase of 20%.
html On January 10, CICC issued a report stating that the inflow of foreign capital will remain strong in 2021, with northbound funds hitting the largest annual net inflow since its opening. Since the beginning of the year, there has been a net inflow of northbound funds for 12 consecutive months. During the year, the inflow of northbound funds exceeded 400 billion yuan, and the cumulative net inflow of northbound funds reached 1.6 trillion yuan. According to the statistics of Securities Times ·Databao, in 2021, Beishang funds purchased A shares for a net amount of 2,431.2 billion yuan, and capital inflows accelerated at the end of the year. The total net purchases from November to December exceeded 100 billion. As of the end of 2021, the market value of Beishang Capital’s A-share holdings exceeds 2.7 trillion. If the market value of QFII positions at the end of the third quarter of last year is added, the value of A-shares held by foreign investors has exceeded 3 trillion yuan.
Of course, the stock market has too frequent inflows and outflows. In the long run, the best indicator for studying the RMB exchange rate is the interest rate difference between China and the United States 10-year bonds , because it contains a lot of information, including real interest rate growth, inflation issues, Term bargaining (i.e. risk preference), etc. Therefore, the long-term interest rate difference between China and the United States is a very critical macro indicator. Before the epidemic in September 2018, the interest rate gap between China and the United States widened significantly, but the RMB depreciated sharply because the RMB was not expected to rise due to emotional factors due to the Sino-US trade war. Therefore, when judging the point, we must first see whether the appreciation of the RMB can make up for the original range.
At the end of 2021, the yield on ten-year RMB government bonds was 2.7899%, and the yield on ten-year US dollar government bonds was 1.513%. The current interest rate differential between China and the United States is around 127bps, corresponding to the central parity level of 6.37-6.38. The current exchange rate level is basically in line with the interest rate differential pricing. The RMB has not overvalued and is still within a reasonable range.
Third, the increase in the proportion of foreign trade affects the rise of CFETS RMB exchange rate index .
CFETS is mainly used to comprehensively calculate the changes in the weighted average exchange rate of a country's currency against a basket of foreign currencies , which can more comprehensively reflect the changes in the value of a country's currency. CFETS is essentially an index focused on export weight, which reflects export competitiveness, so it is highly correlated with export share. On January 21, CFETS was 102.83%, an increase of 7.99% from 94.84% on January 1, 2021. The current CFETS index has basically reached a ten-year high. In 2020, my country's foreign trade accounted for 14.7% of the world's total, and it jumped to 21.6% in 2021. my country's foreign trade proportion increased by 7 percentage points, which is basically consistent with the percentage increase in the CFETS index.
Fourth, the US dollar has not yet raised interest rates.
In fact, the US dollar has not yet raised interest rates. The Federal Reserve is only releasing its intention to raise interest rates and conveying the approximate time and intensity of the rate hike. U.S. stocks have fallen sharply recently and U.S. bonds have strengthened. This is because the U.S. market is digesting expectations of interest rate hikes in the U.S. dollar in advance.
On January 26, the Federal Reserve announced the January FOMC meeting statement, the first interest rate meeting in 2022, which fully set the tone for the start of this tightening cycle. Under unprecedented inflationary pressure, the Federal Reserve revealed that raising interest rates by 50bp at a time and significantly reducing its balance sheet while raising interest rates are all possible policy options. After Federal Reserve Chairman Powell's speech, market panic intensified, the Dow Jones turned lower, the Nasdaq narrowed its gains, the 10-year U.S. Treasury yield rose above 1.88%, and the U.S. dollar index rose above 96.5.
Because there are expectations of interest rate hikes in the US dollar, but there has been no rate hike yet, there are still 1-2 months until the expected interest rate hike time in March. During this period, there will be no change in the interest rate differential between the US dollar and the RMB, and there will be no change in the proportion of Sino-US foreign trade imports and exports. Naturally, the exchange rate will be basically stable and even the RMB will appreciate.
But, but, but! Once the U.S. dollar interest rate hike is implemented, the forces affecting the supply and demand of the RMB and the U.S. dollar will undergo reverse changes, and the RMB exchange rate will turn downward and weaken.
Why do I always predict that if the US dollar raises interest rates, the RMB exchange rate will fall?
First, exports will be greatly affected in 2022, and the export growth rate will drop significantly, resulting in a decline in demand for the RMB, and the CFETS basket of currencies will weaken.
I am in " The State Council proposed 15 support measures for the foreign trade industry that developed the best last year. What is the inside story? As analyzed in the article "", compared with before the epidemic, China's export share increased by 7 percentage points. But at present, the following factors will affect our global import and export share of 21.6% in 2021, making it difficult to maintain a high level.
1. After the U.S. dollar raises interest rates, developed countries will also follow suit, and the global monetary easing that began during the epidemic is about to end. Although we have decided to adopt a countercyclical monetary policy, the currency contraction on the demand side will definitely lead to a reduction in demand for goods, which will lead to a shrinking trend in our foreign trade export orders.
2. After the epidemic is over, the demand related to the epidemic will shrink or even disappear, which will have an impact on exports. The epidemic will gradually exit most countries in March. In the past two years, our export growth rate has been relatively high, exceeding the average export growth rate, mainly products related to anti-epidemic demand. For example: masks, protective clothing, ventilators and other medical equipment.These demands lasted for a year in 2020, especially the last three quarters, and the growth in 2021 is still good. In 2021, my country's exports of medical materials and drugs will increase by 101.2% on the basis of 42.5% growth in 2020. It is nearly five times the growth rate of 21.2% in total exports! , of which exports of human vaccines alone reached 101 billion yuan, a 53-fold increase! When the epidemic ends, these export orders will disappear.
3. The economies of Southeast Asian countries are gradually recovering, and orders from Europe and the United States have begun to increase. Our competitive advantages with other countries may not be so obvious, and some of the exports of traditional daily necessities will definitely be diverted to Southeast Asia.
From the end of 2021 to now, many emerging market countries are gaining momentum to resume work and production. For example, Vietnam , for many international brands, Vietnam has become the first production base after Made in China. Vietnam's extraordinary export growth in the fourth quarter of 2021 was mainly driven by manufacturing exports, far exceeding original expectations. Vietnam's exports reached US$317.45 billion in 2021, a year-on-year increase of 18.7%, surpassing the record of US$282.65 billion in 2020 and reaching a record high, making Vietnam the world's 22nd largest export economy. Among them, Vietnam's export growth rate exceeded 30% in the fourth quarter. And our growth rate in the fourth quarter was lower than the annual average.
Second, the strong momentum of the U.S. economy will continue to boost the U.S. economy after the U.S. dollar raises interest rates, leading to an increase in demand for the U.S. dollar.
In the short term, there are three major aspects of the U.S. economy worthy of attention.
1, the automobile industry chain is expected to start. In the third quarter, the negative drag of the U.S. auto industry on the economy was at least 3.5 percentage points. At present, it is difficult to buy a car or a house in the United States. Of the 5% to 6% CPI growth rate in the United States this year, 3% comes from the surge in used cars and rents. Excluding housing and car factors, the inflation rate may be only 2% to 3%. As the supply shortage of automotive chips gradually eases, the U.S. automotive industry chain is expected to recover. This is the first highlight of the U.S. economy.
2, real estate investment may accelerate. This year, the purchasing, construction, inventory, and financing indicator systems of U.S. real estate have reached decades-level health. In terms of "buying", the balance sheet of US residents is the healthiest in 20 years. The current US NHB index has reached 80% to 90%, which is a very optimistic state. Real estate still accounts for a small but highly volatile variable in the U.S. GDP, and is the second highlight of the economy.
3, Residents’ sufficient savings provide support for consumption. Although the current savings rate in the United States is declining, residents' income is increasing, and there have been excess savings for two consecutive years. During the epidemic, the U.S. residential sector accumulated excess savings of approximately US$2.4 trillion, which contains certain momentum to promote economic growth.
Third, after the U.S. dollar interest rates rise, the reverse flow of cross-border capital will reduce the demand for RMB and increase the demand for U.S. dollars.
From the perspective of RMB assets, especially fixed income, overseas investors have increased their holdings of Chinese government bonds and Chinese stocks in recent years, bringing continuous capital inflows. As long as there is a net inflow of capital, whether it is to buy RMB assets or goods produced in China, it will definitely put appreciation pressure on the RMB. This is one of the important factors why in 2020 and 2021, the U.S. dollar will cut interest rates, expand the interest rate gap between China and the United States, attract capital inflows into China, and drive the appreciation of the RMB. If the Federal Reserve raises interest rates in 2022, the interest rate difference between the RMB and the U.S. dollar will shrink rapidly. There is no doubt that this will lead to profit-seeking cross-border capital selling RMB assets and returning to the United States to purchase U.S. dollar assets. This retreat will reduce the demand for the RMB, increase the demand for the US dollar, and strengthen the US dollar index. The RMB will inevitably face increased depreciation pressure.
If the U.S. dollar index strengthens, the external pressure corresponding to the depreciation of the RMB exchange rate is 3:1, that is, a 3% rebound of the U.S. dollar index roughly corresponds to a 1% depreciation of the RMB.
After the US dollar interest rate increases, the RMB will definitely depreciate, but the extent will be within the control of the central bank.
Taken together, if the U.S. dollar raises interest rates in 2022, the pressure on the RMB will definitely exceed the support, and depreciation will definitely occur, but the depreciation will not be particularly large and will not trigger risks. Because the current round of RMB appreciation in 2020-2021 can basically match strong exports, this means that there will not be much room for subsequent corrections.
At the same time, the central bank has sufficient reserve tools to deal with currency fluctuations. Even if the U.S. dollar index rises unexpectedly to 103 or even 105, one of the unconventional tools is swap points. Even if the exchange rate fluctuates and the RMB depreciates in the future, monetary policy will remain highly controllable. Because the central bank has already had a response plan and prepared sufficient and effective reserve tools to deal with unexpected fluctuations in currency value.
[Author: National Securities Big Data Xu Xiaowei]
