In September 2022, the RMB exchange rate was weak overall, and the overall trend of maintaining a two-way fluctuation in the range of 6.88-7.25. Foreign capital's confidence in RMB assets weakened, northbound funds were net outflows, China-US interest rate spread inverted, Federal Reserve accelerated the process of interest rate hike balance sheet reduction, and the continued recovery of domestic economic fundamentals are the main factors affecting the trend of the RMB exchange rate this month. It is expected that in October 2022, the probability of the Federal Reserve continuing to raise interest rates increases. At the same time, the risk of geopolitical has increased the demand for safe-haven aversion. The US dollar may continue to strengthen in the near future, pushing down the RMB. However, as the domestic epidemic disturbances are alleviated, domestic production and consumption continue to recover, the economy is still supported by the RMB, coupled with seasonal foreign exchange settlement demand. Therefore, it is expected that the RMB exchange rate will be under pressure in October, fluctuating in both directions between 7.00 and 7.30, which is weaker than in September.
1. Market Review
In September 2022, affected by factors such as rising demand for safe-haven, inverted interest rate spreads between China and the United States, the Federal Reserve's strong interest rate hike and balance sheet reduction, and the continued recovery of domestic economic fundamentals, the RMB overall showed a trend of two-way fluctuation in the range of 6.80-7.25 this month. Among them, the RMB onshore exchange rate fell from 6.8990 to 7.0931, with a cumulative decline of 1,941 basis points; the RMB mid-price depreciated from 6.8821 to 7.0998, with a cumulative decline of 2,177 basis points; the RMB offshore exchange rate fell from 6.9156 to 7.1413, with a cumulative decline of 2,257 basis points. Based on the three major RMB exchange rate trend charts since 2021 (as shown in Figure 1), it can be found that mainly affected by the strengthening of the US dollar index and the rising demand for safe-haven, the RMB exchange rate overall weakened in September, showing a fluctuation trend in the range of 6.88-7.25. Among them, the offshore and onshore RMB exchange rates broke through the 7.0 mark on September 15 and September 16, respectively, both broke through the 7.1 mark on September 22, and the onshore RMB broke through the 7.2 mark on September 28 and recovered the 7.1 mark on September 30. The weakening of the RMB has increased since mid-to-late September, mainly because of the overall performance of the US economy in September was not weak, and the CPI data exceeded market expectations, causing the Federal Reserve to raise interest rates by 75 basis points, and strengthened the expectation of the Federal Reserve to raise interest rates in the subsequent rate hikes . In addition, domestic and foreign demand is weak, the US dollar index continues to strengthen to a record high, and the pressure on RMB depreciation has increased. The sharp rise in the RMB exchange rate on September 30 was mainly due to the role of a series of policies to stabilize the exchange rate and the "intervention" of the exchange rate by governments such as Japan and the United Kingdom.
From the internal environment in September, various policies to stabilize growth have continued to be strengthened, economic fundamentals have continued to be restored, the disturbances brought by the epidemic and power restrictions on macroeconomic have been reduced, and the resumption of work and production has been steadily promoted. At the same time, in order to stabilize the economic recovery, domestic policies to stabilize the economy have been further strengthened. At the same time, the disturbances in the epidemic in Yiwu are alleviated, and the continuous efforts of stabilizing foreign trade policies are conducive to supporting the growth rate of exports. Exports are expected to remain resilient and support the September exchange rate. In terms of domestic policy, under the tone of stabilizing growth, the domestic monetary policy remains the main focus, serving to stabilize the economy market . On September 26, People's Bank of China announced that from the 28th, the reserve ratio for financial institutions' forward foreign exchange sales business foreign exchange risk will be raised from 0 to 20%, aiming to stabilize foreign exchange market expectations and ease the pressure on RMB depreciation. On September 29, the Central Bank of stated at the third quarter regular meeting of the Monetary Policy Committee in 2022 that it is necessary to deepen exchange rate marketization reform, enhance the flexibility of the RMB exchange rate, and maintain the basic stability of the RMB exchange rate at a reasonable equilibrium level. Data shows that the manufacturing purchasing managers' index (PMI) in September was 50.1%, up 0.7 percentage points from the previous month. The manufacturing industry continued to rebound, and the effects of economic stabilization policies showed up, providing support for the RMB exchange rate.
Judging from the external environment in September, the interest rate gap between China and the United States is still inverted, and the RMB is still under pressure. As of September 30, the yield on the ten-year US bond was 3.76%, and the yield on the 10-year treasury bond in China was 2.73%; the yield on the 1-year treasury bond in the United States was 3.98%, and the yield on the 1-year treasury bond in China was 1.91%. In terms of cross-border funds, the outflow of northbound funds has dragged down the RMB exchange rate. In September, the total transaction volume of northbound funds was 1848.429 billion yuan, and the net transaction volume was 11.23 billion yuan. In terms of the US dollar index, the expectation of the Federal Reserve's interest rate hike in is strengthened to support the continued strengthening of the US dollar index, and the RMB is still under pressure.
Overall, factors such as the continued recovery of domestic economic fundamentals, imports and exports remain resilient, the Federal Reserve's strong interest rate hike and balance sheet reduction, the inverted interest rate spread between China and the United States, and monetary policy differentiation have caused the RMB to generally weaken this month, showing two-way fluctuations in the range of 6.88-7.25.
2. The future market outlook of RMB exchange rate
The fluctuation trend of RMB exchange rate is the result of the joint action of internal and external factors.
From the perspective of the pull-up factors: First, the domestic epidemic situation has improved, a package of policies to stabilize the economy has continued to be strengthened, and economic fundamentals have maintained recovery. Three state-owned meetings have been held in September and tax and fee support policies have been introduced, aiming to expand effective demand and stabilize the economic market. Second, in terms of exports, the role of domestic policy on stabilizing foreign trade continues to emerge, the policy of ensuring stability and improving foreign trade continues to be strengthened, and exports are expected to remain resilient in the short term. On September 27, the Ministry of Commerce issued the "Several Policy Measures to Support the Stable Development of Foreign Trade", to enhance the ability to fulfill foreign trade contracts and further explore the international market. It is expected that a high trade surplus will remain in October, and the resulting foreign exchange settlement demand will continue to support the RMB. Third, People's Bank of China regulates the exchange rate market. On September 26, the People's Bank of China announced that from the 28th, the foreign exchange risk reserve ratio for financial institutions' forward foreign exchange sales business will be raised from 0 to 20%, aiming to stabilize foreign exchange market expectations and ease the pressure on RMB depreciation.
From the perspective of low-key factors: First, the external environment shows that expectations for global economic recession increased in September 2022, geopolitical conflicts continued, demand for safe-havens increased, and the international environment became more complex and changeable. It is expected that the external environment may continue the tension in October 2022, lowering the RMB exchange rate. Second, in terms of Sino-foreign relations, the US Senate Foreign Affairs Committee initially passed the Taiwan Policy Act 2022 with a 17:5 vote on September 14, aiming to change the policy toward China in the past 40 years. Tensions in Sino-US relations continue, and Sino-US frictions may further intensify in the future. Third, in terms of the Federal Reserve's monetary policy, the Federal Reserve's monetary policy has become tighter under the firm anti-inflation target. In September 2022, the FOMC meeting announced a 75 basis point interest rate hike. The US economy has not experienced a significant decline in the case of a sharp interest rate hike, which greatly increases the probability of the Federal Reserve's further interest rate hikes in the future. Monetary policy is still tight outside and loose inside. Fourth, in terms of factors affecting the US dollar index, the expectation of the Fed rate hike has further strengthened. Coupled with the weakness of euros and the rise in safe-haven demand, the US dollar index continues to strengthen. In the short term, the US dollar index may remain at a high level and maintain fluctuations, which will lower the RMB to a certain extent. As the US dollar index continues to strengthen, U.S. Treasury yields fluctuate and rise, the inverted interest rate spread between China and the United States deepens, and the RMB is still under pressure. Fifth, in terms of domestic policy environment, monetary policy remains mainly based on our own, aiming to stabilize the economic market. At the same time, the uncertainty of the domestic epidemic may affect the recovery of the domestic economic fundamentals, thus putting pressure on the RMB exchange rate.
To sum up, the current fluctuation trend of the RMB exchange rate is mainly affected by domestic and foreign economic fundamentals, global risk aversion sentiment, US dollar index trend, Sino-foreign relations and international political situation. From the perspective of short-term fluctuation range, the unstable factors affecting the RMB exchange rate in October 2022 are mainly China's macroeconomic data in September, US dollar index trend, Sino-US relations development, US economic data, geopolitical rectification risks, etc. The exceeding expectations of these factors will lead to an increase in the fluctuation of the RMB exchange rate. Judging from the overall trend in October, a package of policies to stabilize the economy continues to be strengthened, and a new round of policies to stabilize foreign trade is introduced, which is conducive to the continuous recovery of economic fundamentals and the resilience of exports, providing support for the RMB; the external environment is more complex and changeable, and the Federal Reserve has raised interest rates strongly, pushing the US dollar index to a record high, and the RMB exchange rate is correspondingly lowered; international geopolitical risks continue, leading to an increase in demand for safe-haven and increased volatility of the RMB exchange rate. Therefore, based on the above logical judgment, it is expected that the RMB exchange rate in October 2022 will fluctuate in the two-way range of 7.00 to 7.30.
Introduction to the National Economic Research Center of Peking University:
Peking University National Economic Research Center was established in 2004. Affiliated in Peking University School of Economics .Relying on Peking University , key research areas include China's economic fluctuations and economic growth, macro-control theory and practice, economic theory, China's economic reform practice, transitional economic theory and practice cutting-edge topics, political economy, Western economic teaching research, etc. At the same time, the center closely tracks major changes in the macro economy and policies, incorporates short-term fluctuations and long-term growth into a comprehensive theoretical research framework, interprets them from a unique perspective, grasps macro trends, analyzes data changes, understands the original intention of the policy, and predicts the effectiveness of the policy. The research of the
center has achieved remarkable results, which has had a great impact on China's macroeconomic policy. The most representative results are: (1) Promoting the adjustment of China's population policy . Professor Su Jian , director of the center, has called on China to immediately and completely abandon the family planning policy and instead encourage childbirth. (2) Research on the macro-control system: The center proposes a three-dimensional macro-control system including market-oriented reform, supply management and demand management policies. (3) Research on the intensity of macro-control: In July 2017, this center pointed out that China's macro-control should be strictly prevented from being too strong. This suggestion was approved by the main leaders of the State Council and was also completely consistent with the view that "maintaining macro-control" was put forward in the report of the 19th National Congress three months later. (4) Regarding the results of China's economic target growth rate. In 2013, after careful analysis and calculation, Liu Wei and Su Jian believed that as long as China has an economic growth rate of 6.5% each year, employment can be ensured. Shortly thereafter, this growth rate became the benchmark target for the Chinese government's economic growth rate. The practice of China's economy in recent years has also proved the accuracy of their calculation results. (5) Supply-side research. Professor Liu Wei and Professor Su Jian are the earliest scholars in China to study supply side. They began to publish academic papers on supply management in magazines such as Economic Research in 2007. (6) Research on the new normal. The paper "China's Macro-control under the New Normal" jointly developed by Liu Wei and Su Jian (Economic Science, Issue 4, 2014) is the first academic paper to study the new normal of China's economy. Su Jian and Lin Weibin also studied the new normal in developed countries. (7) "China's Economy Seeking Breakthrough" edited by Liu Wei and Su Jian has been translated into five texts: English, Korean , Russian , Japanese , and Hindi. (8) Research on Beijing subsidy mechanism. In 2008, this research team was commissioned by Beijing Municipal Finance Bureau to design a subsidy mechanism for Beijing subway operation. The mechanism has been used since January 1, 2009 and has been in effect until now.
center publications include: (1) " Yuanfu " magazine. "Yuan Fu" is a monthly electronic publication sponsored by the National Economic Research Center of Peking University. Its purpose is to present the major macroeconomic events at home and abroad this month in the most timely, professional and comprehensive way and provide professional interpretations of key events. (2) " China Economic Growth Report " (annual report). The report mainly analyzes the medium- and long-term problems in China's economic operation. It has been published for 14 consecutive issues since 2003. It is the longest continuous publication of the relevant annual reports and has been included in its annual report funding plan by the Ministry of Education. (3) Series of macroeconomic operation analysis and forecast reports. This center regularly publishes a series of analysis and forecast reports on China's macroeconomic operation, especially the forecast reports of this center are leading the country in terms of prediction accuracy.
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