Two-way float within a reasonable range—
The RMB exchange rate becomes a macroeconomic stabilizer
Our reporter Yao Jin
In 2021, the RMB exchange rate will generally appreciate slightly, but it will still maintain a two-way fluctuation within a reasonable range.
Among them, the RMB exchange rate against the US dollar fell back to a certain extent in March, which was close to 6.58 at one time; it rose to around 6.35 in May and December.
On the whole, the RMB exchange rate is expected to be stable, and the flexibility of two-way floating has increased, which has played the role of a macroeconomic stabilizer.
Entering 2022, how will the RMB exchange rate change, and what factors affect the trend of the RMB exchange rate?
What impact will the change in the RMB exchange rate have?
How to keep the RMB exchange rate basically stable at a reasonable and equilibrium level?
With these questions, the Economic Daily reporter interviewed industry experts.
Appreciation is mainly driven by market supply and demand
Guan Tao, global chief economist of Bank of China Securities, believes that the appreciation of the renminbi in 2021 is mainly driven by market supply and demand.
According to the current central parity quotation mechanism for the RMB exchange rate, the RMB exchange rate is mainly determined by two factors, one is the closing price of the previous day, and the other is the exchange rate trend of the basket of currencies.
The closing price of the previous day largely reflects the relationship between supply and demand in the domestic foreign exchange market, while the exchange rate trend of the basket currency reflects changes in the international financial market.
This is what Liu Guoqiang, deputy governor of the People's Bank of China, once mentioned, the future trend of the RMB exchange rate will depend on market supply and demand and changes in the international financial market.
It is worth noting that behind this quotation mechanism, there is actually a logic implicit, that is: the dollar is strong, the renminbi is weak; the dollar is weak, the renminbi is strong.
However, since 2021, the U.S. dollar has not fallen but has risen. In the first 11 months, it has risen by 6.6%; if according to the pricing formula of the central parity rate of the renminbi exchange rate, the renminbi should depreciate against the dollar. As a result, the renminbi has not depreciated but has appreciated slightly. why?
Guan Tao analyzed that a very important reason is that market supply and demand are at work.
Since 2021, my country's domestic foreign exchange market has generally exceeded demand. In the first 10 months, the bank’s forward (including options) foreign exchange settlement and sales surplus totaled US$194.4 billion, a year-on-year increase of nearly double.
The closing price of the previous day compared with that day's central parity, which has appreciated in value, contributing 170% of the appreciation of the central parity of the renminbi in the past 11 months.
It can be seen that the appreciation of the renminbi in 2021 is mainly driven by market supply and demand.
Due to China's strong exports and strong willingness to settle foreign exchange at the end of last year, the exchange rate of the renminbi has been continuously decoupled from the U.S. dollar index recently.
In this regard, Xie Yunliang, chief macro analyst at Cinda Securities, said that the reason why the renminbi can get out of its independent market is certainly related to the continuous rise of China’s economic status in the world, China’s continued financial opening up to the outside world, the increasing attractiveness of renminbi assets, and the deterioration of the US fiscal and trade deficit. Multiple factors such as dollar credit are related, but the most direct short-term driving force is still strong exports.
Exports have been better than market expectations almost every month. As of November 2021, they have maintained a growth rate of more than 20%, resulting in a high trade surplus and increased foreign exchange inflows, supporting the strong performance of the renminbi.
A dialectical view of the appreciation of the RMB exchange rate
What impact will the appreciation of the RMB exchange rate have on the economy and enterprises?
Xie Yaxuan, chief macro analyst at China Merchants Securities, believes that the appreciation of the renminbi may have an impact on the profitability of export companies, but the impact on the entire import and export industry must be considered comprehensively. It is necessary to consider both the impact on export companies and the impact on import companies. Influence.
"The appreciation of the renminbi is helpful to improve the profitability of importing companies. Even for exporting companies, a considerable number of exporting companies need to import raw materials. Allowing a moderate appreciation of the renminbi will help curb imported inflation and reduce import costs. 2022 The important issue that the global economy will face is that inflationary pressures will remain high.” Xie Yaxuan explained that in addition, if the U.S. dollar falls in 2022, the yuan may also weaken against other currencies, and the decline will be even greater. The profitability of export diversified companies will also help.
Xie Yaxuan also believes that a slightly stronger exchange rate is more conducive to the development of the tertiary industry, such as the service industry related to the real economy, and it is also conducive to promoting technological progress and technological innovation. Therefore, the exchange rate appreciation will contribute to the medium and long-term economic structural adjustment and economic growth. It should also be emphasized.
Therefore, for possible RMB appreciation pressure in 2022, it is necessary to further increase the flexibility of the RMB exchange rate, tolerate exchange rate fluctuations, increase the flexibility of the RMB exchange rate, implement a more flexible and floating exchange rate, reduce and avoid exchange rate distortions, and be dialectical. Look at the impact of the appreciation of the RMB exchange rate on the economy and enterprises.
In fact, with the increase in the marketization of the RMB exchange rate, exchange rate hedging has become an important part of the financial management of foreign trade enterprises.
The eighth national foreign exchange market self-discipline mechanism held recently pointed out that since the China Foreign Exchange Market Steering Committee deployed to promote risk-neutral work in December 2020, the national foreign exchange market self-discipline mechanism has promoted banks to strengthen the promotion of the concept of exchange rate risk neutrality, and effectively helped Enterprises improve exchange rate risk management.
Through the joint efforts of all parties, market entities have become more rational in their understanding of exchange rate fluctuations, and their awareness of risk aversion has continued to increase. The scale of enterprises using foreign exchange derivatives to manage exchange rate risks and the hedging ratio have increased significantly.
Industry insiders emphasize that the current global economic and financial situation is complex and changeable. The monetary policies of the central banks of major economies have begun to adjust, and there are many factors that affect the exchange rate. In the future, the RMB exchange rate may appreciate or depreciate. Two-way fluctuations are the norm, and a reasonable balance is the goal. The degree of deviation is proportional to the correction force.
Only by adhering to the risk-neutral concept of market entities such as enterprises and financial institutions can they better respond to external shocks.
Continue to float within a reasonable range
Regarding the factors that will affect the trend of the RMB exchange rate in 2022, Guan Tao said that under trade, China's export prospects are still a key factor affecting the trend of the RMB exchange rate.
China's export situation in 2022 will mainly depend on the development of the global epidemic, facing two situations.
If the global epidemic gradually improves and the economy reopens, China may face an outflow of export orders, a decline in growth rate, and a decline in trade surplus, which will narrow the domestic foreign exchange supply and demand gap, and the RMB exchange rate may depreciate; but if the global epidemic continues to spread, the economy will restart. Obstructed, China’s export share has risen and its trade surplus has expanded, which will continue to support the RMB exchange rate.
Guan Tao also said that under the capital account, the inflow or outflow of funds is not necessarily related to the trend of the RMB exchange rate.
For example, in the first three quarters of 2021, the capital account (including net errors and omissions) is in deficit, but the central parity of the RMB against the US dollar has fallen by 0.7%, increased by 1.7%, and decreased by 0.4%, respectively.
This is because after the central bank withdrew from the normal intervention of the foreign exchange market, the current account and capital account in the balance of payments showed a mirror image relationship.
Xie Yaxuan believes that considering the base factor, China’s export growth rate may show a downward trend in the future, but since 2019, the scale of my country’s current account surplus has increased moderately compared with before, which corresponds to the large improvement in global demand for Chinese products. trend.
Therefore, in the future, the current account surplus scale and the proportion of my country’s GDP will remain between 1.5% and 2%. As the GDP scale grows at a normal rate of 5% to 6% per year, the scale of my country’s current account surplus will continue to rise in 2022. , From the perspective of market supply and demand, it will also support the strong RMB.
In addition to export prospects, market factors affecting the RMB exchange rate in 2022 include China-US interest rate differentials, financial risks, economic recovery, and the U.S. dollar index.
Guan Tao said that if the U.S. inflation indicators continue to remain high in 2022, it is not ruled out that the Fed may raise interest rates ahead of schedule, and in order to maintain stable economic growth in China, monetary policy must adhere to the principle of self and stability.
"In recent years, the flexibility of the RMB exchange rate has increased, the currency mismatch of the private sector has improved significantly, and the current domestic inflationary pressures are relatively light. These have increased the freedom of my country's monetary policy. If the liquidity of the US dollar becomes tight, the liquidity of the RMB continues to be loose. Even more accommodative, this may further converge the Sino-US interest rate gap, slow down the momentum of foreign capital inflows, and thereby shrink the gap between foreign exchange supply and demand." Guan Tao believes in analysis.
The recent 2022 People’s Bank of China Working Conference requested that the renminbi exchange rate flexibility should be enhanced and the renminbi exchange rate should be basically stable at a reasonable and equilibrium level.
In Guan Tao's view, with the ever-expanding financial opening, the RMB exchange rate will become more and more of an asset price attribute.
Only a foreign exchange market with depth, breadth, and liquidity can better exert market functions such as resource allocation, price discovery, and risk aversion.
To this end, it is necessary to accelerate the cultivation of the domestic foreign exchange market, orderly expand the two-way financial opening, especially the expansion of private foreign investment channels, and allow the two-way flow of cross-border capital to complete domestic and foreign currency exchanges in the country, and strengthen the renminbi in financial transactions in the onshore market. Exchange rate pricing power actively promotes the stability of the RMB exchange rate.