As of August 23, the yields of China-US 10-year Treasury bonds were 2.657% and 3.003% respectively. Data from the China Foreign Exchange Trading Center shows that as of June, overseas institutional investors have net selling of RMB bonds for four consecutive months.

As of August 23, the yields of China-US 10-year Treasury bonds were 2.657% and 3.003% respectively. Data from the China Foreign Exchange Trading Center shows that as of June, overseas institutional investors have net sold RMB bonds for four consecutive months

pictures/Visual China

article｜Special author Zhang Weilong

edited by Zhang Wei Yuanman

5 After mid-April, the onshore RMB depreciated by about 4,000 basis points in one month; on May 8, the onshore RMB exchange rate against the US dollar was 6.7894. In the following three months, the onshore RMB was depreciated by about 800 basis points again...

The ups and downs of the RMB exchange rate in recent months have driven the tense atmosphere in the trading room of a foreign bank in Shanghai, from mumbling to shouting. Linda (pseudonym), who is also a trader in Shanghai's foreign bank, expressed her understanding of these reactions. "After all, for us, market fluctuations represent opportunities."

Linda seized the opportunity. In late July, the onshore RMB fell below 6.77, and she judged that the RMB would continue to fall. Therefore, as a new foreign exchange trader, , Linda decided for the first time to take long-term overnight positions to go long the US dollar RMB currency pair (that is, holding US dollar RMB currency pairs for many consecutive days without selling them, and selling them after the US dollar appreciates and makes a profit). This made her a big profit and became a "highlight moment in the workplace so far."

Behind Linda's big profit was the continuous decline in the RMB exchange rate against the US dollar. On August 24, data from the China Foreign Exchange Trading Center showed that the RMB against the US dollar was 6.8388. As of press time, the onshore RMB and offshore RMB exchange rates against the US dollar were 6.8351 and 6.8582 respectively, the lowest points in the past two years and depreciated by about 7.5% from mid-April.

Behind the depreciation of the RMB, the impact of the differentiation of monetary policies between China and the United States, is gradually emerging.

On July 27, the Federal Reserve hikes interest rates for the fourth consecutive interest rate meeting and raised 75 basis points for the second consecutive interest rate; on August 15, the People's Bank of China open market carried out a 400 billion yuan 1-year MLF (medium-term lending facility) operation, with the winning rate of 2.75%, down 10 basis points from the previous time. This is the second time that the MLF interest rate has been lowered this year.

senior foreign exchange analyst Yuan Tao believes that in the future changes in the RMB exchange rate, we must first pay attention to the Federal Reserve's monetary policy, which will have a direct impact on the USD index . At present, although US inflation has stabilized, it is still at a high level and core inflation has not dropped, which means that the Federal Reserve may continue to adopt a interest rate hike policy in the future.

From the perspective of domestic factors, my country's foreign trade situation in the future will still be the key to dominating the direction of the RMB. Yuantao analyzed that under the background of a high base, it is still unknown whether China's foreign trade situation can remain strong in the third quarter. On the one hand, this still depends on the recovery of demand in major foreign trade export directions such as Europe and the United States, and on the other hand, it depends on the changes in price factors.

traders' risk preference changes

Traders of the level of Linda generally conduct intraday trading because their risks are controllable. Recently, the strong dollar trend has increased Linda's risk appetite and she has begun to take overnight positions.

"I didn't dare to increase my position in the US dollar/RMB currency pair at the beginning, and I was worried that I would look at the wrong direction. But when I opened the computer the next day, I found that the US dollar/RMB market was still very strong, so I strengthened my belief in longing the US dollar." Linda said.

Some senior traders are even more bold. Behind this boldness is that they are determined to see the direction of the appreciation of the US dollar and then decisively hold heavy positions. These senior traders saw the RMB against the US dollar at 6.9, and have not sold their currency pairs until now. Linda bluntly stated that if the market really develops in this direction, they may make a lot of profits.

Compared with senior traders, Linda looks quite immature. “I have had a few times recently when the dollar peaked and I sold my currency pairs.But in the end, the US dollar was still rising, so I had to buy the US dollar back at a high price. "Linda said with a wry smile. Cai Shaoli, a researcher at the FICC team of

Huatai Futures FICC team, believes that the recent depreciation of the RMB is largely a passive depreciation. From the perspective of international factors, the US dollar continues to strengthen, which is closely related to the Federal Reserve entering a cycle of interest rate hikes and driving funds back to the US market.

data shows that as of August 24, the US dollar index hit the high of the year, reaching 108.7, up 4.7% from the end of April. On July 27, the Federal Reserve raised interest rates for the fourth consecutive interest rate meeting and raised interest rates by 75 basis points for the second consecutive interest rate hike. Since March, the Federal Reserve has raised interest rates by 225 basis points. US fiscal Ministry data shows that in the first half of this year, the net inflow of US capital reached US$812 billion.

Cai Shaoli said that from the perspective of domestic factors, against the background of strengthening the US dollar and returning funds to the US market, the People's Bank of China repeatedly implemented the loose monetary policy of , resulting in significant differentiation of the monetary cycle of Sino-US relations. This caused the interest rate spread of China-US bonds inverted, and led to foreign capital slowing the allocation of domestic RMB financial assets.

In the first half of the year, the People's Bank of China's monetary policy was relatively loose. On August 15, the latest MLF operation was released. On that day, the People's Bank of China's open market carried out 400 billion yuan in one-year MLF operation and 2 billion yuan. The RMB 7-day reverse repurchase operation, with the winning bid rates of 2.75% and 2.0%, respectively, both down 10 basis points from the previous time. This is the second time that the MLF interest rate has been lowered this year.

April, the interest rate spread of 10-year treasury bonds in China and the United States has been inverted for the first time since 2010. As of August 23, the yields of 10-year treasury bonds in China and the United States were 2.657% and 3.003% respectively. Data from the financial terminal Choice shows that so far in July, the net outflow of northbound funds reached about 13.63 billion yuan. Data from the China Foreign Exchange Trading Center shows that as of June, overseas institutional investors have net selling RMB bonds for four consecutive months. 6.

Yuan Tao said that behind the differentiation of monetary policies between China and the United States, the performance of the differentiation of in the economic cycle of . In the United States, although inflation has slowed down, it is still high, and employment is constantly improving, which provides the "confidence" for the Federal Reserve to raise interest rates. China's current economic growth is weak, and the problem faces by the central bank is that stabilizing the economy is not stabilizing inflation.

inflation and employment are the two most important goals of the Federal Reserve's monetary policy. Data from the U.S. Department of Labor shows that from May to July, the U.S. consumer price index (CPI) rose by 8.6%, 9.1% and 8.5% year-on-year after quarterly adjustment. In July, the U.S. non-farm employment data exceeded expectations, and the unemployment rate and the labor participation rate both fell slightly. In July, 528,000 new non-farm employment was added, and the unemployment rate fell by 0.1 percentage point to 3.5%.

The background of the People's Bank of China's lowered MLF interest rate this time is that the current credit willingness in the real economy is relatively low and the economic vitality is insufficient. Data released by the People's Bank of China on August 12 showed that new RMB loans were 679 billion yuan, a year-on-year increase of 404.2 billion yuan; the increase in social financing scale in July was 756.1 billion yuan, a year-on-year increase of 319.1 billion yuan.

Central Bank : Enhance the elasticity of RMB exchange rate

Generally speaking, the central bank's monetary policy goals include economic growth, price stability, full employment, and balance of payments. Some market analysts believe that the Chinese central bank chose to cut interest rates by stimulating the economy, which is equivalent to allowing the exchange rate to gradual depreciation of .

"The depreciation of the RMB seems to be the last policy choice." Gene Ma, chief Chinese economist at the Washington Institute of International Finance, said that "Due to the weak demand for loans, housing failed to respond to policy easing, and monetary policy fell into the ' liquidity trap '."

A trader from a Hong Kong foreign bank said that the reason why the People's Bank of China did not choose to intervene in the foreign exchange market is because, from the absolute level, the depreciation of the RMB is relatively large, but from the relative level, other non-US currencies depreciate against the US dollar is even stronger, which means that the depreciation of the RMB is still within a controllable range.

Since mid-April, the euro, the pound and the yen have depreciated by about 8.1%, 10.2% and 8.0% against the US dollar respectively, of which the euro fell below parity against the US dollar twice. Since the beginning of this year, the exchange rate of the RMB against other currencies has been relatively strong. The RMB exchange rate index of China Foreign Exchange Trading Center can be used as a factor to measure the performance of the RMB against a basket of 24 currencies. According to the latest data on August 19, the index is roughly at the level of early 2022.

Yuan Tao believes that this is also related to the hope of the People's Bank of China to regulate the exchange rate market through market means.

In the second quarter "China Monetary Policy Implementation Report" that we must grasp the balance between internal and external factors. Deepen exchange rate marketization reform, insist on the market playing a decisive role in the formation of the RMB exchange rate, enhance the flexibility of the RMB exchange rate, strengthen the expectation management of , and give full play to the automatic stabilizer of exchange rate regulation macroeconomics and balance of payments.

Deputy Director and spokesperson of the State Administration of Foreign Exchange said on July 27 that since the beginning of this year, facing more complex and severe external shocks and challenges, whether from the price indicators related to the RMB exchange rate, or from the quantitative indicators such as balance of payments and foreign-related receipts and payments, we can clearly see the characteristics of my country's foreign exchange market's enhanced resilience. Specifically: First, the RMB exchange rate elasticity has increased and performed stably on a global scale. Secondly, my country's cross-border capital flows are generally stable and show a relatively balanced development trend. Third, the current account surplus and the inflow of long-term capital are still the basic market for stabilizing my country's cross-border capital flows. Wang Chunying said that in the second half of the year, the RMB exchange rate will remain basically stable at a reasonable equilibrium level.

Yuantao further stated that from the demand side, consumption, investment and foreign trade are the "three pillars" that support the sustained economic growth. The People's Bank of China chose to cut interest rates and then allow the exchange rate to depreciate gradually, which is expected to drive foreign trade growth and can help my country's economy achieve its goal of stabilizing growth.

Director of the National Bureau of Statistics National Economic Accounting Department said that the net export of has increased its role in driving my country's economy. In the first half of the year, net exports of goods and services drove economic growth by 0.9 percentage points. Among them, net exports of goods and services in the second quarter drove economic growth of the quarter by 1.1 percentage points. Data from the State Administration of Foreign Exchange shows that in the second quarter of 2022, my country's current account surplus was US$80.2 billion, and in the first half of 2022, my country's current account surplus was US$169.1 billion.

CICC research report stated that the downward trend in MLF interest rates can stabilize economic growth expectations and may boost the valuation of the Chinese stock market. The current reduction of MLF interest rates will help support cross-border inflows of northbound funds and stabilize cross-border stock revenue and expenditure. This logic has played a role in driving exchange rate stabilization after the five-year LPR interest rate ( loan market quotation rate ) on May 20 this year.

future trend is affected by multiple factors

Yuan Tao believes that in the future changes in the RMB exchange rate, we must first pay attention to the monetary policy of the Federal Reserve, which will have a direct impact on the US dollar index. At present, although US inflation has stabilized, it is still at a high level and core inflation has not dropped, which means that the Federal Reserve may continue to adopt a interest rate hike policy in the future. Aneta Markowska, chief economist at

Jefferies chief economist, said that there are four major driving factors for the rise in US prices, namely commodity prices, supply chain challenges, housing and labor shortages. Although the first two are gradually disappearing in the upward role of inflation, housing and labor shortages will continue to be reflected in service inflation.

The Federal Reserve Observation Tool of the Chicago Mercantile Exchange shows that traders predict that the probability of announcing a 50 basis point interest rate hike after the Federal Reserve's monetary policy meeting on September 22 is 62.5%, and the probability of a 75 basis point interest rate hike is 37.5%.

Yuan Tao reminded that if the US economy slows down or triggers a recession, it will become a consideration for the Federal Reserve to temporarily suspend aggressive interest rate hikes. Since the US economy is mainly driven by domestic consumption, it is crucial to observe the recovery of domestic consumption.

Data from the US Department of Commerce on July 28 showed that in the second quarter of this year, the US real GDP (GDP) fell by 0.9% month-on-month, which has shrunk for the second consecutive quarter. Wall Street institutions expect U.S. consumption momentum may show signs of slowing. FactSet said that the upcoming monthly retail sales rate in July will drop sharply from 1% to 0.2%, among which Citigroup and Bank of America expect retail data to turn from rising to falling.

The aforementioned trader of Shanghai foreign bank said that from a technical perspective, the euro is the "reverse" of the US dollar, accounting for about 60% of the US dollar index. The future trend of the euro will inversely affect the US dollar index. The stalemate of the Russian and European energy issues has caused a sharp rise in European gas prices, coal prices and electricity prices, which will drag down the European economy and make the euro decline.

From the perspective of domestic factors, Gary Ng, senior economist at the French Foreign Trade Bank (Natixis), believes that the People's Bank of China is unlikely to cut interest rates again "for the time being", but will try to increase the money supply. He said that there are many ways to do this, such as lowering the bank reserve ratio of .

Yuan Tao believes that from the perspective of domestic factors, my country's foreign trade situation in the future will still be the key to dominating the direction of the RMB. Against the backdrop of a high base, it is still unknown whether China's foreign trade situation can remain strong in the third quarter. On the one hand, this still depends on the recovery of demand in major foreign trade export directions such as Europe and the United States, and on the other hand, it depends on the changes in price factors.

Cinda Securities research report believes that this round of continuous growth of exports is more due to price factors. In the short term, as overseas central banks tighten financial conditions, overseas demand in the second half of the year may face great pressure. However, price contribution still supports it, and exports are expected to fall within the year.