This year, the RMB exchange rate against the US dollar has depreciated sharply and fluctuated violently. Where is the decisive factor for the exchange rate next year? There are the following dimensions: one is market factors, two is management factors, and three is exchange rate

This article is reproduced from the author | Danqiu Tai

This year, the RMB exchange rate against the US dollar has depreciated sharply and fluctuated violently. Next year, where is the decisive factor for the exchange rate going? There are the following dimensions: one is market factors, two is management factors, and three is exchange rate adjustment factors.

Since 2022, the RMB exchange rate against the US dollar has depreciated sharply and fluctuated violently. How to judge the trend of the RMB exchange rate against the US dollar in 2023? The author believes that the exchange rate trends are different under different exchange rate systems, so the exchange rate trends should be analyzed based on the exchange rate formation system.

, RMB exchange rate formed institutional changes: "quasi-crawling" and "other management arrangements"
According to the authoritative classification of International Monetary Fund , the US dollar exchange rate has long been a free floating "Free floating". Since China's 811 exchange rate reform in 2015, the RMB exchange rate system has changed significantly. In 2015, the fund organization adjusted the renminbi exchange rate system to a quasi-crawl "Crawl-like arrangement", in 2016, it was "Crawl-like arrangements" in 2017 and 2018, it was adjusted to "Other managed arrangements" in 2019 and 2020, and it was adjusted to "Crawl-like arrangements" in 2021. China's legal practice is to manage the floating exchange rate system "Managed floating", that is, the RMB exchange rate formation mechanism adheres to the "market supply and demand-based, reference to a basket of currencies for regulation, and managed floating exchange rate system ". Therefore, looking forward to the trend of RMB-USD exchange rate in 2023, we need to analyze it from the following perspectives: one is market factors, the second is management factors (government management factors are reflected in "giving full play to the functions of macroeconomic and the balance of payments automatic stabilizer", that is, the function of the exchange rate economy to promote economic growth and maintain price stability), and the third is exchange rate adjustment factors (the core is to achieve "the RMB exchange rate remains basically stable at a reasonable equilibrium level through macro-prudential management).

. Market factors: From "basically withdrawing from normalized intervention" to "removing from normalized intervention"
Since the exchange rate reform in 2005, especially since the exchange rate reform in 811 in 2015, the marketization of the RMB exchange rate against the US dollar has been continuously improved. On October 18, 2017, Pan Gongsheng, deputy governor of the People's Bank of China and director of the State Administration of Foreign Exchange, said before the opening meeting of the 19th National Congress of the Communist Party of China, that the RMB exchange rate has been relatively stable in recent times, and it can be seen that the exchange rate is driven by marketization. Central Bank has basically withdrawn from normal intervention. After the 19th National Congress of the Communist Party of China, the RMB exchange rate will have a more stable basis. IMF estimates that “the estimated results from mid-June to early August 2018 show that PBOC has almost no foreign exchange intervention”. In 2019, President Yi Gang said, "The People's Bank of China has withdrawn from normal intervention, the marketization level and elasticity of the RMB exchange rate have been significantly improved, and it has maintained a stable position in the international monetary system . The RMB exchange rate is determined by market supply and demand." The People's Bank of China's "Monetary Policy Implementation Report" in the third quarter of 2022 continued to mention that "the People's Bank of China has withdrawn from normal intervention, and the RMB exchange rate is determined by market supply and demand."

What is the exchange rate determined by market supply and demand? It includes the equilibrium exchange rate determined by fundamentals and the market exchange rate including various disturbances. Economic theory believes that fundamentals include price trends, relative productivity changes in the two countries, international investment, trade terms, fiscal variables and interest rate spreads . The People's Bank of China believes that the fundamentals include several points: "First, the domestic economy, is stable and stable, which is the biggest fundamental for the stable exchange rate", "The economy is strong resilience, great potential, and sufficient vitality, and the long-term positive fundamentals have not changed"; the basic market, "Second, the foundation of the balance of payments market is solid, which is the basic for the stable operation of foreign exchange market"; the cornerstone "Third, foreign exchange reserves rank first in the world, which is the cornerstone for maintaining exchange rate stability and financial security."

. Government factors: Give full play to the function of automatic stabilizer for the exchange rate to regulate the macroeconomic and balance of payments
Economic theory believes that the progressive tax system, automatic transfer payment system, flexible price and exchange rate are the automatic stabilizers of market economy , which can help the economy automatically achieve equilibrium. The automatic exchange rate stabilizer is manifested in that due to fundamental and non-fundamental factors, the depreciation of 's local currency in is conducive to improving the competitiveness of the country, improving the balance of payments, and improving fundamentals.

management of exchange rates plays an important role in achieving the government's macroeconomic goals. For example, undervaluation of exchange rates can improve the competitiveness of domestic commodities and promote the improvement of net exports in the three troikas. Exchange rate appreciation is conducive to resisting imported inflationary pressure and ensuring the stability of prices. Under the G20 framework, most countries have given up the exchange rate war to promote economic growth by beggaring neighbors. In November 2022, the Treasury Department’s seminnual Report to Congress reviews developments in international economic and exchange rate policies across the United States’ major trading partners were determined according to Section 701 of the 2015 Act. “(1) The bilateral trade surplus with the United States is significant; (2) Major current account surplus; (3 Continuous unilateral intervention in the foreign exchange market”, and found that 15 countries in the 20 important trading partners had significant trade surplus with the United States, and the other two items in China are not significant, see Table 1.
Table 1 Assessment standards for major foreign trade partners of the United States

Data source: US Treasury Department

As for whether governments interfere with exchange rates to ensure price stability, no specific policies have been seen yet. The RMB exchange rate against the US dollar, the United States has long adhered to the " free floating exchange rate system ", so it intervenes in order to stabilize prices The possibility of exchange rate is low. In China, the People's Bank of China's third quarter 2022 monetary policy implementation report rarely proposes "maintaining basic stability of the RMB's currency value and purchasing power", so The People's Bank of China has the option to defend price stability with the exchange rate system.

4. A managed floating exchange rate system and macro-prudential tool
The 2021 report of the International Monetary Fund adjusted the RMB exchange rate system to "quasi-crawl", which is characterized by "In a statistical identification trend, exchange rate fluctuations must be maintained within the 2% volatility range and last for at least six months; if the exchange rate appreciates or depreciates in a fully monotonous or continuous manner, and the annualized rate fluctuation is not less than 1%, it can be defined as a similar crawl system."

The People's Bank of China's third quarter 2022 "Monetary Policy Implementation Report" believes that the managed floating exchange rate system "has this opportunity in history The system has withstood the test of multiple rounds of external shocks, "The RMB exchange rate can be adjusted flexibly and restored equilibrium in a short period of time, effectively playing the role of a buffer against external shocks." Although the RMB exchange rate has withdrawn from normal intervention, it is necessary to maintain the basic stability of the RMB exchange rate at a reasonable equilibrium level." The intervention of "resolutely calming down the major ups and downs of the exchange rate" is still necessary. Since the US dollar accounts for a relatively large proportion in the package, the RMB exchange rate against the US dollar must also be stable. First, intervene in the exchange rate through macro-prudential tools commonly used by the international community, Table 2 It is a macro-prudential policy tool of the People's Bank of China since 2017. Some tools were launched in a timely manner during the period of major fluctuations in the RMB against the US dollar. countercyclical factor has been withdrawn. The report of the People's Bank of China also believes that "the formation mechanism of the RMB against the US dollar mid-price exchange rate is constantly improved, and the rules, transparency and marketization level are improved." The second is through the intervention of the foreign exchange market. Since the RMB exchange rate is a "quasi-crawling" exchange rate system, and the United States is "free floating", China may have a certain degree of single While interfering with hedging , the negative effects of US radical monetary policy may of course also cause dissatisfaction with trading partners.

5. 2023 RMB exchange rate trend prospect

outlook 2023 RMB exchange rate trend, one is based on fundamentals, and the other is based on the characteristics of the exchange rate system.


►1. China-US fundamental difference: The US dollar is seriously overvalued, and the RMB is close to the equilibrium level


The goal of the People's Bank of China is to "stay basically stable at a reasonable equilibrium level". On the one hand, it is reflected in the stability of the exchange rate level of a basket of currencies for various currencies, and on the other hand, it also reflects that the market exchange rate level of each currency pair is close to the actual effective exchange rate level REER. The International Monetary Fund estimated in September 2022 that the US dollar was seriously overvalued and the RMB exchange rate level was slightly overvalued, which is the fundamentals of the RMB against the US dollar.

Table 3 The International Monetary Fund's valuation of exchange rate valuation and recent developments

Source: US Treasury Department

Table 4 It can be seen that the world's major authoritative institutions are relatively optimistic about China's economic fundamentals, and the differences in economic growth between China and the United States have not narrowed significantly. These forecasts will strongly affect the market's decision to judge the RMB against the US dollar based on fundamentals.

►2. "Qual crawling" and "managed floating exchange rate system" determine the characteristics of RMB crawling against the US dollar exchange rate

fundamentals affect exchange rate levels. On the other hand, the market is also irrational and often not always based on fundamentals. Because fundamental variables affect exchange rates, some are cyclical, some are short-term, and some are long-term, and these fundamental variables do not strictly affect exchange rates, and may be determined by the economic system at the same time as the exchange rate, so the impact is relatively complicated. Moreover, there are some overshoots in the foreign exchange market, trading costs , and heterogeneous traders (basic analysts with rational expectations, short-term speculation technology analysts). Therefore, there are many factors that affect exchange rate, and the management components of the RMB exchange rate must exist.

Looking forward to the RMB against the US dollar in 2023, we believe that it is also necessary to base ourselves on the characteristics of the RMB exchange rate system "quasi-crawl" and "managed floating exchange rate system". 2023 world economy is relatively uncertain due to high inflation and geopolitical risk. In 2023, China "continues to promote exchange rate market-oriented reform". There are huge uncertainties in China's epidemic, real estate, external demand, private consumption and credit demand. Therefore, the unpredictable components of the exchange rate have increased. The central bank reported that "Don't bet on the unilateral appreciation or depreciation of the RMB exchange rate, and you will lose if you bet for a long time." At the same time, "the RMB exchange rate remains basically stable at a reasonable equilibrium level", and the central bank also stated that it "resolutely calms down the major ups and downs of the exchange rate."

Therefore, the equilibrium exchange rate level of the RMB against the US dollar in 2023 will appreciate as the US dollar returns to the equilibrium level. Various bilateral uncertainties increase the fluctuations of the RMB against the US dollar. The specific amplitude depends on the forward-looking, expectant, timely and strength of the central bank's macro-prudential policies.