Flexibility continues to increase, and the RMB exchange rate remains stable with a solid foundation

In 2023, the tide of global interest rate hikes ebbs and flows, financial markets are repeatedly repriced by emergencies, and the world's major currencies have gone through a year of huge fluctuations; although the RMB exchange rate has also experienced multiple stages of appreciation, depreciation, stabilization and recovery, etc. , but the overall situation remains at a reasonable and balanced level.

Looking forward to 2024, as my country's various policy measures continue to exert their effects and the economy rebounds, RMB assets will continue to be attractive; coupled with the weakening trend of the US dollar index, favorable domestic and foreign factors will increase, and the RMB exchange rate is expected to continue its upward trend. .

Exchange rate flexibility continues to increase

Looking back at the whole year of 2023, the central parity rate of RMB against the US dollar has depreciated by 1,181 basis points cumulatively, with a decline of 1.7%. This decline has narrowed significantly compared with 9.23% in 2022; the onshore RMB has depreciated by 1,406 basis points cumulatively against the US dollar, with a decline of 1.7%. 2.02%; the offshore RMB fell by 2,038 basis points against the US dollar, a decrease of 2.9%.

At the beginning of 2023, the exchange rate of RMB against the U.S. dollar rebounded for a short period of time. In January 2023, affected by factors such as the weakening of the U.S. dollar and strengthening economic expectations, the RMB recovered the 6.7 mark and then fell back in shock, and then stayed in the range of 6.8 to 6.9. However, as the U.S. dollar index rebounded strongly, rising by 2.5% in just 5 months, the RMB experienced a significant decline, and the RMB exchange rate once again fell into the 7 range, once hitting a bottom of 7.26.

Entering July 2023, as the Federal Reserve became increasingly vague about its interest rate hike policy and the economic recovery accelerated after the implementation of a series of domestic policies, the RMB exchange rate experienced a small rebound. However, this upturn could not be sustained. At the end of July, the Federal Reserve announced another 25 basis point interest rate hike and took a tough stance, which dampened market interest rate cut predictions. The U.S. dollar index quickly strengthened, and the RMB exchange rate fell again. It fluctuated sideways near the 7.3 mark for a long time, with the lowest hitting 7.35. After November, external pressure The easing and domestic economic recovery have pushed the RMB exchange rate to rebound significantly, regaining the 7.3 and 7.2 marks one after another, and breaking through the 7.1 mark during the session on December 14. Among them, the onshore RMB hit a maximum of 7.0955.

"Overall, the RMB exchange rate fluctuations have increased in 2023, mainly affected by the 'resonance' of the complex internal and external environment." Zhou Maohua, a macro researcher at the Financial Markets Department of Everbright Bank, analyzed that since the beginning of 2023, the domestic macro economy has fluctuated, superimposed The political and economic prospects of developed economies are uncertain, and the fluctuation of the US dollar has intensified. However, throughout the year, the RMB exchange rate remained stable overall and continued to fluctuate in both directions near a reasonable equilibrium level, and the RMB exchange rate against a basket of currencies was basically flat.

In fact, my country's financial management department has repeatedly emphasized that this two-way fluctuation of the RMB exchange rate is a normal phenomenon. Previously, the People's Bank of China mentioned in the article "Deeply Promoting the Market-Based Exchange Rate Reform" that the People's Bank of China has steadily deepened the market-based reform of the exchange rate and continuously improved the managed floating exchange rate system based on market supply and demand and adjusted with reference to a basket of currencies. , the level of marketization of the RMB exchange rate continues to improve, market supply and demand play a decisive role in the formation of the exchange rate, the flexibility of the exchange rate continues to increase, two-way fluctuations have become the norm, and the RMB exchange rate has remained basically stable at a reasonable and balanced level. Practice has proved that this is an exchange rate system arrangement suitable for China's national conditions, and it effectively plays the role of an automatic stabilizer of macroeconomics and the balance of payments.

Guan Tao, global chief economist of BOC Securities, said that the increased flexibility of the RMB exchange rate has improved the autonomy of interest rate regulation and promoted macroeconomic stability; while stable economic fundamentals have supported exchange rate stability, and the foreign exchange market has become more resilient and has Helps form a positive interaction between interest rates and exchange rates.

Resolutely guard against the risk of exchange rate overshooting

Both the Central Financial Work Conference and the Central Economic Work Conference clearly emphasized the need to "maintain the basic stability of the RMB exchange rate at a reasonable and balanced level." It is worth noting that during the period when the RMB exchange rate continued to weaken in the first half of 2023, no regulatory intervention was seen, whether it was verbal guidance or actual actions.

In this regard, Zhang Jingjing's team at China Merchants Securities analyzed that the market's early consensus expectations for the depreciation of the RMB exchange rate have not yet formed, which is an important basis for the central bank to maintain policy determination. "Since 2018, the focus of the central bank's foreign exchange policy has been to manage market consensus expectations rather than specific points." In fact, the RMB exchange rate against the U.S. dollar has broken "7" several times in the past few years, but it has returned to "7" in a short period of time. "7" or less. Therefore, "7" is no longer a psychological barrier, the overall economy is stable, and people's expectations are stable.

When will the RMB exchange rate return to below “7” this time? Industry experts said that the slow recovery of the RMB exchange rate against the US dollar was mainly caused by the "diametrically opposite" monetary policies of China and the United States, and was superimposed on the market's concerns about future economic growth. As expectations of interest rate cuts by the Federal Reserve increase and China's economy recovers, there is a high probability that the RMB will rise steadily in 2024.

"The interest rate differential between China and the United States is expected to gradually return to normal. The valuation of RMB assets is low and has strategic allocation value. As the global political and economic situation becomes increasingly complex, RMB assets are expected to become a safe haven for global capital and provide investors with stable long-term Give back." Zhou Maohua said.

If it is said that the regulatory authorities do not want to hold on to a specific exchange rate in the first half of 2023, then in the second half of the year "it will be taken action when it is time to take action" is by no means an empty talk. In order to stabilize the RMB exchange rate expectations, on July 20, 2023, the People's Bank of China and the State Administration of Foreign Exchange decided to increase the macro-prudential adjustment parameters for cross-border financing of enterprises and financial institutions from 1.25 to 1.5. On August 22, the central bank issued a tender in Hong Kong The 35 billion yuan central bank bill is the fifth time central bank bills have been issued in 2023, and it is also the largest issuance. After that, the central bank continued to issue 15 billion yuan of six-month (182-day) central bank bills in Hong Kong on September 19, of which 5 billion yuan was a rolling renewal and 10 billion yuan was an additional issuance. This is the second time in a month that the central bank has issued additional offshore central bank bills to increase the cost of shorting the yuan. On September 1, in order to improve the ability of financial institutions to utilize foreign exchange funds, the central bank decided to lower the foreign exchange deposit reserve ratio of financial institutions by 2 percentage points from the current 6% to 4% starting from September 15.

In Guan Tao's view, since the second half of 2023, relevant parties have adopted a series of policy measures to stabilize the exchange rate, such as raising the macro-prudential adjustment parameters for cross-border financing, lowering the foreign exchange deposit reserve ratio of financial institutions, and increasing the issuance of offshore central bank bills. The cumulative effect gradually appear. “Especially since November 20, 2023, the daily fluctuations of the central parity rate of the RMB exchange rate have increased significantly. Changed from the situation where the daily fluctuations of only a few basis points since October have been adjusted by dozens or even hundreds of basis points, further igniting the situation. This has aroused the market's enthusiasm for long RMB positions," Guan Tao said.

The recently held 2023 fourth quarter regular meeting of the Monetary Policy Committee of the People's Bank of China also made it clear that it will deepen the market-oriented reform of exchange rates, guide enterprises and financial institutions to adhere to the concept of "risk neutrality", implement comprehensive policies, correct deviations, stabilize expectations, and resolutely deal with procyclicality. We must correct deviations, resolutely prevent the risk of exchange rate overshooting, prevent the formation of unilateral consensus expectations and self-reinforcement, and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.

RMB assets remain attractive

As the effects of macroeconomic policies emerge, the fundamentals of the economy will become more solid, which is the biggest fundamental for the stable operation of the exchange rate. Our country insists on implementing normal monetary policy, with sufficient policy space and rich toolbox. At the same time, the trend of RMB is clear, RMB assets are safe, and the world's recognition of RMB will continue to increase in the future. In addition, the RMB exchange rate formation mechanism is suitable for China's national conditions and can give full play to the role of the "two hands" of the market and the government. It has withstood multiple rounds of external shocks. The People's Bank of China has accumulated rich experience in response and can effectively manage market expectations and provide exchange rate support. Stability provides a solid guarantee.

The key to stabilizing the exchange rate still lies in stabilizing the economy. In the process of economic recovery and tortuous development, stabilizing the exchange rate cannot replace necessary policy stimulus and structural adjustment, but is more about buying time for economic adjustment. Industry experts believe that despite future disturbances from international policy factors and market behavior, the relative changes in economic growth, price changes, and balance of payments between China and the United States will continue to promote the continued appreciation of the RMB exchange rate.

First, looking at external factors, since December 2023, many central banks around the world have chosen to suspend interest rate increases, and the market focus has further shifted to the timing of interest rate cuts. In 2024, the risk of economic slowdown in the United States will increase, inflation expectations will cool, and a presidential election will be held. The Federal Reserve may end its interest rate hike cycle and switch to interest rate cuts with a high probability. Against this background, the U.S. dollar index may continue to fall, the interest rate gap between China and the United States will continue to narrow, and the external pressure on the RMB exchange rate will be alleviated.

Secondly, from the perspective of internal factors, the "Troika" will jointly promote my country's economic growth to varying degrees in 2024. If policies continue to promote and demand continues to be released, consumption will still become the first driving force for economic growth. While infrastructure investment and manufacturing investment are still the two main means of stabilizing investment and growth, real estate investment has weakened its drag on investment driven by favorable policies and economic recovery.

At the same time, as the world economic growth declines, although my country's exports may continue to be under pressure, resilience remains. With the support of proactive fiscal policy and prudent monetary policy, my country's insufficient market demand will improve in 2024, and GDP is also expected to show slight growth.

Finally, my country currently has ample policy tools for exchange rate control, and its foreign exchange reserves continue to rank first in the world, which will also support the stability of the RMB exchange rate.

Data show that with the recent strengthening of the RMB exchange rate, foreign capital under securities investment has generally resumed a net inflow. China Galaxy Securities report shows that in November 2023, the capital and financial account deficit narrowed significantly by US$17.7 billion month-on-month. Securities investment ended four consecutive months of deficit and turned into a surplus of US$13 billion. In November, the net increase in domestic bond holdings by foreign investors reached US$33 billion, the second highest level in history. There has been a net inflow of foreign capital under Bond Connect for three consecutive months. Among them, in November, foreign-funded institutions mainly increased their net holdings of treasury bonds by 112.8 billion yuan, interbank certificates of deposit by 86.7 billion yuan, and policy bank bonds by 49.4 billion yuan.