1 RMB exchange rate fluctuation trend and international economic cycle differentiation
Three RMB exchange rate system reforms in 2005, 2014 and 2015 were carried out in the name of improving the exchange rate formation mechanism, and repeatedly announced the reference to a basket of currencies instead of pegging at the exchange rate equilibrium benchmark of a single dollar and the exchange rate floating direction of bilateral fluctuations rather than one-way appreciation. However, from the launch of exchange rate system reform in 2005 to 2013, the RMB exchange rate basically maintained a long-term trend of one-way appreciation in reference to the US dollar. After the subprime mortgage crisis , the RMB exchange rate continued to appreciate in one direction based on the US dollar, and the appreciation rate only adjusted as the pressure on the international community weakened or strengthened, and the international trade surplus expanded or contracted.
The monthly average exchange rate of RMB between 2014 and 2018 is shown in Figure 1. After expanding the trading price fluctuation range between the RMB and the US dollar in 2014, the RMB exchange rate experienced significant bilateral fluctuations. After the reform of the mid-price quotation system between the RMB and the US dollar in 2015, the RMB exchange rate showed a significant one-way depreciation between 2015 and 2016. The RMB exchange rate fell back after excessive depreciation and appreciated moderately in 2017. It continued to depreciate significantly in one-way from the beginning of 2018 and formed a general market expectation of continued depreciation, until the reversal of appreciation began in 2018.
Figure 1 The monthly average exchange rate of RMB and US dollar and SDR
RMB has not yet been fully convertible on the balance of payments capital account, and the RMB exchange rate is still determined jointly by the market supply and demand situation and exchange rate policy choice. Since the subprime mortgage crisis, China's economy has accelerated external rebalancing adjustments, the relative proportion of net exports to national income has declined, and trade projects that have international capital flows rather than balance of payments have begun to dominate the supply and demand of spot and forward foreign exchange markets. Starting from the natural motivation of international interest rates and exchange rate arbitrage, speculative international capital and non-speculative international capital will inevitably reflect the international differences in the economic recovery phase and economic growth prospects, which ultimately led to violent fluctuations, large depreciation and bearish expectations of the RMB exchange rate since 2014. The second and third exchange rate system reforms only reflect and freely release the market adjustment pressure of the RMB exchange rate more sensitively, and are not the fundamental driving force for the depreciation of the RMB exchange rate during this period.
China's economic prosperity recovered rapidly in 2010 and 2011 after the trough in 2009, and then bottomed out for the second time due to the early withdrawal of stimulus policies. From 2012 to 2013, a new normal of China's economic development transition from high-speed growth to medium-speed growth began to form, but the judgment of the high domestic interest rate level compared with the international zero interest rate, as well as the general situation where China's economic recovery is in the fast lane and the US economic recovery is in the slow lane, still supports the appreciation trend of the RMB exchange rate. Since 2014, the new normal of China's economic development shifting to medium-speed growth has been gradually accepted. The US economic recovery has made steady progress while China's economic recovery has become increasingly stagnant. 2014 has thus become a turning point in the RMB exchange rate from appreciation to depreciation. With the withdrawal of the US quantitative easing (QE) monetary policy, the role of fast lanes and slow lanes of China's economic recovery and the US economic recovery has completely changed, and the RMB exchange rate has entered its first depreciation cycle since the implementation of a managed floating exchange rate system in 1994.
2 The long-term appreciation mechanism of RMB real exchange rate
Based on the productivity effect of traditional purchasing power parity (PPP) theory, dynamic PPP theory models the system deviation of the actual exchange rate to the level of traditional PPP theory and its dynamic evolution characteristics. Dynamic PPP theory qualitative prediction, since developing countries are equivalent to developed countries with a relatively low degree of marketization, openness, supply efficiency of trade sectors and integration with the international market, the actual exchange rate has been underestimated compared with the traditional PPP theoretical level for a long time; at the same time, in the process of economic development, with the gradual improvement of their degree of openness, supply efficiency of trade sectors and integration with the international market, the actual exchange rate continues to appreciate and tends toward the traditional PPP theoretical level. The gradual increase in its degree of marketization may lead to the continuous depreciation of the real exchange rate.
Based on the per capita national income Y and per capita PPP national income Y_PPP of each country and region in the 2017 World Development Indicator (WDI) database, the calculatorable equation Y/Y_PPP = - 6.271691 + 0.462357•lnY + 23.48571/lnY was obtained using the OLS method to estimate the dynamic PPP theory.Figure 2 shows the scatter plot of Y and Y_PPP indicators and the Y/Y_PPP ratio fitting curve of each country and region; among which, the U-shaped fitting curve bottomed out at Y = 1245.27 US dollars and turned from decline to increase.
Figure 2 International per capita national income and per capita PPP national income
In 2017, the ratio of per capita national income to per capita PPP national income Y/Y_PPP = 0.51850, and the corresponding fit value of PPP theory can be calculated is 0.51126, and the difference between the two is 1.416% relative to . After China's per capita national income exceeds the critical level of the real exchange rate's decline from decline to increase, the driving force of RMB exchange rate appreciation has long been dual, that is, the historical fitting disparity between China's Y/Y_PPP ratio and the equation Y/Y_PPP = C +α•lnY + β/lnY narrows and converges to the international trend, and China's per capita national income increases the Y/Y_PPP ratio along the equation Y/Y_PPP = C +α•lnY + β/lnY. By 2017, China's Y/Y_PPP ratio was very close to the world trend, and the growth of per capita national income has become the main driving force for the actual appreciation of the RMB exchange rate, so the future trend of the RMB exchange rate stability and appreciation is strictly dependent on China's economic growth prospects.
3 The dispute over the ruling currency exchange rate policy
The reason why the interest rate hike cycle of US monetary policy triggered the depreciation cycle of RMB exchange rate is mainly due to the international expected differentiation of the US economic recovery leading China's economic recovery and the excellent US economic growth than China's economic growth. In a more general sense, the real exchange rate trend of the RMB based on the economic recovery phase and economic growth prospects, as well as the corresponding role of China's macroeconomic policies, including exchange rate policies, together constitute a macro-analytical dimension that analyzes and predicts the nature and development trend of the RMB exchange rate volatility.
The United States understands the nature of the subprime mortgage crisis with a positive attitude of the so-called old cycle rather than the new normal. Its trinity policy combination of expansionary monetary policy, expansionary fiscal policy and structural reform is still a counter-cyclical demand management operation under the guidance of Keynesianism, and designs and implements unconventional QE monetary policy under the premise of optimistic expectations of economic growth prospects. Facing the current severe pressure on RMB depreciation, achieving deflation and supporting the international competitiveness of the RMB exchange rate, or increasing the international attractiveness of the RMB exchange rate, such a monetary exchange rate policy choice, due to its pro-cyclical demand management tendency, will inevitably further increase rather than alleviate the downward pressure on the overall economy and the pressure on the depreciation of the RMB. It should be pointed out that since the implementation of the QE monetary policy, there has been no global inflation that monetaryists have repeatedly predicted. During the turning point of economic structure and economic prosperity, the currency multiplier and currency circulation speed are extremely unstable and cannot meet the fine-tuning and pre-tuning requirements of demand management.
Figure 3 measures China's nominal GDP ratio to the United States based on the nominal GDP ratio of China and the United States, and decomposes it into the triple contribution factors of the difference in real GDP growth rate between China and the United States and the difference in inflation rate of the GDP deflator index and the appreciation rate of the RMB against the US dollar. Since the RMB implemented a managed single floating exchange rate system in 1995, due to the superposition effect of high economic growth rate, high inflation rate and the appreciation of the nominal exchange rate of the RMB, China's economic catch-up process has made great progress between 2002 and 2013. Since 2014, the roles of fast lanes and slow lanes of economic recovery between China and the United States have completely changed, and the corresponding low economic growth rate, low inflation rate and nominal exchange rate of the RMB have stopped appreciation or even depreciation, resulting in slowing down and even stagnating China's economy oversight.
Figure 3 China's accounting of factors for the US economic catch-up
Since the subprime mortgage crisis, international monetary policy has changed from the so-called new consensus on single price stability targets and single interest rate tools to a broad monetary policy framework of multi-policy goals and multi-policy tools, which is consistent with China's practical experience in prudent monetary policy. Since the exchange rate has not been liberalized, China's monetary policy and foreign monetary policy are independent of each other within a considerable range; because the interest rate has not been liberalized, China's interest rate policy and credit policy are independent of each other within a considerable range.China's monetary policy can and should carry out comprehensive adjustments between economic stability and financial stability, as well as internal and external balance. On the premise of optimistically predicting economic growth trends and objectively understanding the economic depression situation, it will implement more active counter-cyclical demand management operations to effectively prevent financial risks and stabilize the RMB exchange rate. We must be wary of the cumulative cycle and self-realization of pessimistic expectations of economic growth trends, satisfactory judgments of economic prosperity and negative choices of demand management policies.
(Author’s unit: School of Applied Economics, Renmin University of China)
