(Mid-Year Economic Observation) The elasticity of two-way fluctuations has increased. How will the RMB exchange rate go in the second half of the year?

  China News Service, Beijing, July 25 (Reporter Xia Bin) Since the beginning of this year, against the backdrop of the high US dollar index, the world's major non-US currencies have depreciated to varying degrees, but the RMB has shown a relatively strong trend, and the exchange rate is relatively strong. The elasticity of two-way fluctuations is enhanced.

  In the first quarter, the exchange rate of the RMB against the U.S. dollar remained in the 6.3 range and moved forward. However, with the risk spillover from the external conflict between Russia and Ukraine and the Fed's official launch of the monetary tightening policy, superimposed on the situation that the domestic epidemic situation spread more and more, the RMB exchange rate has changed from 4 to 4. A wave of sharp declines began in January, during which it fell below 6.8 for a time, and stabilized in mid-May, fluctuating around 6.7.

  As of July 21, the U.S. dollar index had risen by more than 11% this year, the euro, pound and yen depreciated between 10% and 17% against the U.S. dollar, and the renminbi depreciated by 5.8%.

From the perspective of multilateral exchange rates, the RMB exchange rate index appreciated by 0.1%, which means that the RMB remains basically stable against a basket of currencies.

  Guan Tao, the global chief economist of BOC Securities, specifically mentioned that in the first half of 2022, the maximum amplitude of the central parity of the RMB exchange rate is 7.8%, which is equivalent to 66.8% of the average maximum amplitude of the other seven reserve currencies in the same period, and in 2020 and 2021, respectively were 55.2% and 36.4%.

  He further said that the increased flexibility of the exchange rate will help release pressure in a timely manner, avoid expected accumulation, and help to play the role of a "shock absorber" for exchange rate fluctuations to absorb internal and external shocks.

On the contrary, the exchange rate policy is rigid, which may constrain domestic monetary policy and affect the confidence of foreign investors.

  It is worth noting that the monetary policy report released by the People's Bank of China for the first quarter of 2022 put forward the expression "enhancing the flexibility of the RMB exchange rate".

Analysis believes that exchange rate fluctuations are a natural risk that cross-border capital needs to face, but if the exchange rate fails to follow the capital flow due to excessive intervention, the exchange rate will become "rigid" and lead to the failure of hedging tools, which may lead to cross-border capital flows. The panic of foreign capital is not conducive to the long-term equilibrium and stability of the exchange rate.

  In fact, since 2018, China's foreign exchange market has experienced many challenges from the sharp drop in the RMB exchange rate and the impact of capital flow reversal, and the market's resilience has become increasingly evident.

Guan Tao pointed out that one of the main reasons for the increased resilience of China's foreign exchange market is the increased flexibility of exchange rate floating.

  How will the RMB exchange rate go in the second half of the year?

The chief economist of CITIC Securities clearly stated that looking forward to the market outlook, there may still be three potential pressures on the RMB, including the inflection point of the U.S. dollar index, the loosening of expectations for rapid recovery of domestic economic fundamentals, and the increased pressure on banks to sell foreign exchange.

  He said that in the short term, on the one hand, the RMB has strong support from China’s exports, on the other hand, it may still be under the upward pressure of the U.S. dollar index. Under the relatively balanced long and short forces, the recent trend of the RMB may depend more on the performance of the A-share market. , the stock exchange linkage effect has strengthened, and its essence reflects the expectation of domestic macroeconomic fundamentals to be repaired.

  In the medium term, we need to pay attention to the changes in domestic exports and the trend of the US dollar index. If exports remain resilient and the US dollar index shows an inflection point due to the further decline in the fundamentals of the US economy, the RMB may return to strength.

  According to Wang Chunying, deputy director of the State Administration of Foreign Exchange of China, the RMB exchange rate will remain basically stable at a reasonable and balanced level in the second half of the year, and various factors will support the above judgment.

  First, China's economy has stabilized and recovered, major economic indicators have improved, and the industrial chain and supply chain have remained stable, which will continue to play a fundamental role in supporting the RMB exchange rate.

  Second, China's foreign trade and foreign investment are resilient, and funds from the real economy, such as trade and investment, will still be the base for inflows, which will help maintain a basic balance between supply and demand in the foreign exchange market.

  Third, the exchange rate expectations of market players are basically stable, and the rational trading model of "purchasing foreign exchange on dips and settlement on highs" is maintained.

  In addition, China's external asset-liability structure has been continuously optimized, and the scale of foreign exchange reserves has remained generally stable, ranking first in the world, still playing an important role as a "stabilizer" and "ballast stone" for stabilizing the country's economic and financial security.

  "Of course, the trend of the RMB will be affected by multiple factors such as foreign exchange supply and demand and the international financial market. It may also fluctuate to a certain extent in the short term, and it may rise or fall. The RMB exchange rate will remain flexible and float in both directions. It will remain basically stable at a reasonable and balanced level," Wang Chunying said.

  Guan Tao emphasized that all parties should treat the fluctuation of the RMB exchange rate and capital flow with a normal mind, and do not need to over-interpret or over-react.

At the same time, it is also necessary to formulate plans on the basis of scenario analysis and stress testing to be prepared.

In particular, enterprises should further strengthen the awareness of risk neutrality and control currency mismatches and exchange rate exposures.

(Finish)

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