3. The downward pressure and expectations of the economy are the root cause of the decline of the RMB exchange rate
External factors work through internal factors. The downward pressure on my country's economy is the fundamental reason for the decline in the RMB exchange rate.
is affected by factors such as geopolitical and the recurrence of the epidemic. my country has experienced unprecedented economic downward pressure this year. At the 429 Politburo meeting, the central government took various measures to stabilize the economy, which led to the improvement of economic data in June. This is also an important reason why the RMB-USD exchange rate remained relatively stable in July, but the economic data in August showed that the foundation of the economic market was not solid, and the risks of economic downturn were not completely eliminated, causing the RMB-USD exchange rate to fall again.
Since the beginning of this year, downward pressure on the economy has formed a triple shock wave on my country's foreign exchange supply and demand relationship. The first impact is the impact on securities investment. Although China's capital accounts are not fully open to the public, this impact cannot be ignored. This impact is the most direct. In addition to the downward pressure on the economy, the inverted interest rate between China and the United States is also an important reason, mainly reflected in foreign capital's reduction in holdings of Chinese bonds and net outflows of the mainland-Hong Kong Stock Connect. Judging from the interest rate spread between China and the United States, the largest inversion in history has appeared, reaching about -0.9%.
Judging from the reduction of holdings of Chinese bonds by overseas investors, the reduction has been seen in August, although the reduction in July and August decreased by 28.1 billion yuan and 27.76 billion yuan respectively from nearly 100 billion yuan.
Judging from the data of the Lukou Stock Connect, in sharp contrast to the data last year, there was a significant net outflow of buying funds in most months.
Overseas investors hold A shares. The market value of also generally declined. It rebounded from the first quarter in the second quarter. It was 5.04% in the second quarter and 4.92% at the end of March, but it was 5.5% in the same period last year.
The second impact is the impact on foreign direct investment. This impact has been reflected in the initial balance of payments in the second quarter. Preliminary balances of payments in the second quarter showed that the direct investment surplus decreased significantly, and the surplus shrank sharply in the second quarter to US$15 billion, compared with the previous value of US$59.9 billion. Judging from the external payments and payments in
7, there was a rare deficit, with a deficit of US$3.442 billion. Direct investment in August continued the deficit, but narrowed to US$1.584 billion
. Behind it, higher frequency data shows that foreign companies are affected by the overall environment, and the industrial added value of decreased significantly year-on-year and cumulative year-on-year, with a decrease significantly higher than that of non-foreign enterprises.
At the same time, it is also reflected in the significant increase in foreign-invested loss-making enterprises.
Judging from the preliminary data of the balance of payments in the second quarter, it is also reflected in the investment income deficit.
The third impact is the impact on foreign trade. Although this wave of impact has not yet appeared from the data, foreign trade data still show good resilience, this impact may still come sooner or later. One reason is that a large part of China's foreign exports are actually undertaken by foreign investors. According to data in 2016, the export delivery value of foreign enterprises accounts for 35%. When foreign businessmen face losses and withdrawals, the impact of foreign trade will also be inevitable.
According to the foreign trade data in August, there has been a significant change. Exports have declined year-on-year, and exports to the US dollar have shown negative growth, which is the first negative growth since 2020.
Another data that the author is concerned about is that this year, Regional Comprehensive Economic Partnership Agreement (RECP), which is the first time that free trade ties have been established between China and Japan, China and South Korea have been established. However, trade between China and Japan, China and South Korea has not risen but fallen this year, not as good as in previous years.
Therefore, in this sense, only when the economy is stable, especially the stability of economic growth expectations, can the exchange rate be stable. Without economic stability, there will be no exchange rate stability.Judging from the latest investment data, real estate investment, which accounts for nearly 25% of fixed asset investment in , still declines and has not stopped the decline.
Of course, the instability of the RMB exchange rate against the US dollar is also affected by non-economic factors such as Sino-US relations. As the United States stubbornly challenges the bottom line for China on the Taiwan issue, there are unstable expectations for Sino-US relations. Judging from recent years, the sharp decline in the RMB against the US dollar in September 2019 and May 2020 is related to the serious ups and downs in Sino-US relations.
4. The attitude of the central bank and the tools that are being used and may be used in the toolbox
The author has always believed that observing the central bank's actions is an important window for analyzing the direction of the exchange rate. In this round of exchange rate decline, the central bank's attitude is ambiguous. First, when the exchange rate is under pressure, the central bank lowered MLF and LPR, showing that the importance of internal equilibrium is higher than that of external equilibrium, showing the great downward pressure on the economy, and showing the "mainly self-centered" .
Second, although the central bank does not lack policy tools in stabilizing the exchange rate, so far, it has only used the reserve requirement to reduce the foreign exchange deposit reserve. Recently, after reducing the 2 percentage points of the foreign exchange deposit reserve, it has only increased the foreign exchange supply by 19 billion US dollars, and the current daily spot inquiry volume of US dollars is around 40 billion US dollars. And starting from the fourth quarter of 2020, the central bank took a variety of measures to slow the rate of appreciation of the RMB against the US dollar. Third, the central bank has recently clearly launched the countercyclical factor , but it is secretly announced. It is in sharp contrast to the public announcement of the April 2018 year restart countercyclical factors. For example, when the intermediate price on September 22 rose significantly within the range, it was lower than the closing price of on the day before yesterday by 737 basis points.
We have noticed that the weakening of the RMB exchange rate has accelerated recently. It is close to the important observation point, and the pressure has increased significantly. According to the NDF, the implicit depreciation rate of the RMB exchange rate has increased significantly recently.
exchange rate has fallen rapidly in the short term, which may trigger systemic financial risks. Therefore, it is not ruled out that the central bank has recently introduced measures to stabilize the exchange rate. These measures are most likely to correct measures to slow the rise in exchange rates in the fourth quarter of 2020. For example, the forward foreign exchange margin for banks is increased from 0% to 20%, the macro-prudential coefficient of cross-border financing of financial institutions is increased, the macro-prudential adjustment coefficient of overseas loans of domestic enterprises is increased, the macro-prudential adjustment parameters of cross-border financing of domestic enterprises are increased, etc. It is also possible to issue RMB notes in Hong Kong offshore market , etc.
, of course, the central bank also has strategic measures to stabilize the RMB exchange rate in the long term, that is, to enhance the attractiveness of RMB assets. At the recent second half of the year work meeting, the central bank spent a relatively long time talking about the internationalization of the RMB: strengthening the coordination of domestic and foreign currency policies. Strengthen the market foundation for trade and investment RMB settlement. Support overseas entities to issue " Panda Bond ", steadily promote the start of "swap connection" and improve the liquidity of RMB financial assets. Support the healthy and orderly development of the offshore RMB market. These measures are conducive to maintaining the basic stability of the RMB exchange rate at a equilibrium level.
Indeed, the attractiveness and internationalization of RMB have been greatly improved. The "2021 RMB Internationalization Report" by the Central Bank shows that in June 2021, the RMB ranked fifth in the proportion of international payment currencies, accounting for 2.5% of international reserve currencies.
In terms of my country's foreign revenue and expenditure, the RMB has become the main payment currency except the US dollar. The RMB payment ratio has increased from 26% in 2019 to 44% at present, and the RMB payment ratio has increased from 29% in 2019 to 42% at present.
Domestic RMB assets held by overseas entities at the end of last year increased by 42.8% year-on-year to 10.83 trillion yuan. Although bonds and other shares have been reduced this year, it still reached 10 trillion yuan at the end of June. However, in May 2020 and September 2019, it was only 6.7 trillion and 5.9 trillion respectively. The internationalization process of RMB is undoubtedly accelerating.
5. 7.2 is an observation point, but not an iron bottom
. In the recent sharp decline of the RMB, especially after the RMB fell below 7 yuan, the market moved the observation point to 7.2 yuan, because in 2018 and 2020, the RMB exchange rate stopped falling at 7.2 yuan. The author also believed that 7.2 yuan was an important observation point, and its practical significance would exceed 7 yuan. 7 yuan was actually just a psychological barrier.
But 7.2 yuan is not an iron base. The reason is that as mentioned above, the central bank has ambiguous attitude towards the decline of the exchange rate. Its essence is that it hopes that the exchange rate will play a role in self-regulation and achieve internal equilibrium and external equilibrium. In the current situation, the importance and externality of internal equilibrium should be much higher than the external equilibrium, that is, the importance of the exchange rate in exerting macro-regulation is higher than the adjustment of balance of payments.
Reason 2: The central bank has always said that the RMB exchange rate will maintain a reasonable equilibrium and maintain two-way fluctuations. But where is this reasonable equilibrium level? In fact, this reasonable equilibrium level is dynamic, that is, it is adjusted according to the status of macroeconomic . The range of two-way fluctuations will also change.
According to the author's long-term observation, so far, this reasonable equilibrium level is between 6.7 yuan, and the fluctuation range is between 6.3 and 7.2 yuan. However, this reasonable equilibrium level is expected to adjust under the downward pressure of the economy.
Historically, there has been such a precedent. For example, before 2018, its target management area was centered at RMB 6.6, between RMB 6.3 and RMB 6.9. After the fourth quarter of 2018, its target management area was centered at 6.95 yuan, between 6.7 yuan and 7.2 yuan:
In August 2018, the US dollar against the RMB once rose to above 6.9 yuan. The central bank took decisive measures such as restoring forward foreign exchange sales risk reserve , re-enabling countercyclical factors, tightening offshore market RMB liquidity through the issuance of offshore central bank notes, and increasing offshore RMB transaction costs . Therefore, the US dollar against the RMB exchange rate fell back to the range below 6.9 yuan.
But in the fourth quarter of 2018, when the US dollar rose above 6.9 yuan again, the central bank did not take decisive measures on the exchange rate as in August, but tolerated the US dollar rose above 6.9 yuan and approached the 7 yuan psychological mark. This move means that the central bank adjusts the so-called reasonable equilibrium level, and the exchange rate has entered a new volatility range. In the annual exchange rate research report of that year, the author called the fluctuation of the RMB exchange rate in 2018 "from the snake in the hole to the snake out of the hole."
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