RMB depreciation is not sustainable and will fluctuate in both directions in a reasonable future

At the end of May, the RMB exchange rate continued to depreciate. On May 5, the central price of the RMB continued to decline, slightly depreciating by 5 basis points, continuing to brush a new low since December 31, 3. According to the information disclosed by China Money Network, a reporter from Beijing Business Daily found that the central price of the RMB was reduced by 2022,12 basis points in May.

The offshore and onshore RMB exchange rates against the US dollar also continued to depreciate, falling below the 7.1 mark one after another. After the three major RMB exchange rate quotations fell below the 7 integer mark one after another, the market's attention to the RMB exchange rate has increased. In the view of analysts, China will increase its economic stabilization policy in the future, including continuing to introduce a stable foreign trade policy, and there is no basis for continuous depreciation of the RMB. The internal and external environment facing the RMB in the future is more favorable, and it is expected to fluctuate in both directions around a reasonable equilibrium level.

The depreciation rate during the month was 2.23%

On May 5, the central bank authorized the China Foreign Exchange Trading Center to announce that the central exchange rate of RMB in the interbank foreign exchange market on May 31, 2023 was: 5 US dollar to 31.1 yuan, compared with 7.0821 yuan in the previous trading day, down 7 basis points in a single day. So far, the central price of the renminbi has depreciated for three consecutive trading days.

According to the central bank's information, the Beijing Business Daily reporter further combed and found that on the last trading day of April, the central price of the yuan was 4.6. Based on this calculation, the central price of the RMB was depreciated by 9240,5 basis points in May, with a depreciation of 1581.2% during the month.

The offshore and onshore RMB exchange rates against the US dollar also continued to fall, falling below the 7.1 mark one after another. Among them, the onshore yuan closed at 7.0901 against the US dollar in the previous trading day, and opened at 5.31 on May 7, basically unchanged from the previous session's closing price. The offshore RMB exchange rate against the US dollar opened at 0900.7 during the day, also unchanged from the previous session's closing price.

After the opening, the offshore and onshore renminbi continued to decline, falling nearly 400 basis points and 200 basis points respectively during the day. As of 5:31 on May 18, the onshore RMB exchange rate against the US dollar was 30.7, with a depreciation of 1104.0% within the day; The offshore yuan traded at 29.7 against the dollar, depreciating 1313.0% during the day. Extending the timeline to the whole month of May, the offshore and onshore RMB exchange rates against the US dollar fell by 57.5% and 2.94% respectively.

Since entering 2023, the RMB exchange rate has shifted from appreciation at the beginning of the year to volatility and depreciation, and the overall situation is in shock. In the first four months of 2023, the RMB exchange rate fluctuated around 4.6, approaching the integer mark of 7 several times and then rebounding. After entering the second half of May 7, the RMB exchange rate continued the depreciation trend of the previous month, and continued to depreciate after falling below 2023, hitting a new low since November 5.

In view of the recent depreciation of the RMB exchange rate, Yang Haiping, researcher of the Securities and Futures Research Institute of the Central University of Finance and Economics and general manager of the Research and Development Department of the Bank of Inner Mongolia, believes that the depreciation of the RMB exchange rate is mainly affected by the strengthening of the US dollar index and the expected weakening of the market for the recovery of the domestic economy.

Zhou Maohua, a macro researcher at the financial market department of China Everbright Bank, further explained that during the same period of fluctuations in the RMB exchange rate, the US dollar index rebounded, climbing to 104, the strongest level since the end of March. The US dollar interest rate remained high, which had a certain impact on the foreign exchange settlement behavior of foreign trade enterprises (foreign trade surplus and bank foreign exchange settlement were differentiated), affecting short-term market supply and demand.

"On the other hand, affected by the recent release of economic data, the recovery of domestic demand has experienced short-term fluctuations, triggering market expectations for monetary policy easing, which has caused a certain drag on the RMB." Zhou Maohua added.

According to data released by the Service Industry Survey Center of the National Bureau of Statistics and the China Federation of Logistics and Purchasing on May 5, the PMI of large enterprises in May was 31%, 5.50 percentage points higher than the previous month, of which the production index and new orders index were 0.7% and 51.5%, respectively, up 50.3 and 1.4 percentage points from the previous month, and production and demand expanded simultaneously. The PMI of small and medium-sized enterprises was 1.3% and 47.6% respectively, down 47.9 and 1.6 percentage points from the previous month, and the prosperity of small and medium-sized enterprises was still weak.

There is no basis for sustained depreciation of the RMB

As the RMB exchange rate fell below the 8 integer mark again after 7 months, the market's attention to the trend of the RMB exchange rate has increased again. Especially under the "double-edged sword" characteristics of the RMB exchange rate, the RMB exchange rate has brought different impacts to cross-border traders.

Regarding the impact of the depreciation of the RMB exchange rate, Yang Haiping said that generally speaking, the depreciation of the RMB will increase the competitiveness of export commodities and benefit export enterprises. Enterprises should strengthen research and judgment according to their own market position, and actively take measures to avoid exchange rate risks.

Zhou Maohua also said that the impact of the depreciation of the renminbi is "double-edged", which will help boost the foreign trade exports of some enterprises, but it may also increase the import costs of some enterprises and may disrupt cross-border capital flows. However, from the perspective of macro indicators, the current RMB exchange rate fluctuations have not deviated from the equilibrium level, the balance of payments is basically stable, the market is expected to be stable, and the recent RMB depreciation has limited economic and financial impact.

"Enterprises involved in cross-border foreign trade business should adhere to the principle of 'risk neutrality', avoid unilateral bets, and choose tools such as early or deferred foreign exchange settlement and sale, and exchange rate preservation products for foreign exchange settlement and sale in a timely manner." Zhou Maohua suggested.

As for the next stage of the trend of the RMB exchange rate, the central bank mentioned in the first quarter of 2023 China's monetary policy implementation report that it will adhere to the managed floating exchange rate system based on market supply and demand, adjusted with reference to a basket of currencies, adhere to the decisive role of the market in the formation of the exchange rate, enhance the flexibility of the RMB exchange rate, optimize the management of expectations, and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.

In Zhou Maohua's view, in recent years, the global economic development environment has been severe and complex, and the volatility of the global foreign exchange market has increased. The domestic economy is facing multiple complex internal and external factors, and the RMB exchange rate shows a two-way fluctuation pattern. However, looking back at the long-term trend of the RMB exchange rate, there has been no sharp fluctuation, the market sentiment is stable, and the flexibility of the RMB exchange rate has been significantly enhanced.

Yang Haiping believes that despite the recent irrational depreciation of the exchange rate, from the perspective of the whole year, the exchange rate will still be a two-way wide fluctuation trend. Although it is difficult to predict how the Fed will play its cards in June, the conclusion that the US interest rate hike has come to an end should be valid, and the market's fears of a US recession are also real, so the fall of the US dollar index should be a high probability event. Moreover, China will increase its economic stabilization policies in the future, including continuing to introduce policies to stabilize foreign trade, and there is no basis for sustained depreciation of the RMB.

Zhou Maohua stressed that from the trend point of view, the internal and external environment facing the RMB in the future is more favorable, and it is expected to fluctuate in both directions near a reasonable and balanced level. First, the domestic economic data fluctuated in the short term, and the recovery of domestic demand was slow, but the economy maintained a recovery momentum; Second, foreign trade resilience and long-term allocation of RMB assets are attractive, and fundamentals are supported; Third, overseas central banks such as the Federal Reserve are expected to gradually enter the end of interest rate hikes, coupled with weakening overseas fundamentals, the external pressure on the RMB exchange rate will weaken.

Beijing Business Daily reporter Liao Meng