Fundamental Factors Expected to Gradually Strengthen Support in the Foreign Exchange Market
Driven by a combination of internal and external factors, the RMB/USD exchange rate has recently continued to fluctuate, attracting market attention. On June 28th, the onshore RMB fell below 7.25 against the US dollar during the trading session, while the offshore RMB briefly fell to 7.2692, both reaching new lows since November 2022. How to view the recent trend of the RMB exchange rate? Will the RMB exchange rate weaken for a long time?
The rapid changes in China's foreign exchange market are influenced by comprehensive factors both domestically and internationally. Clarifying the reasons for depreciation helps to better analyze and judge the direction and trend of future changes in the RMB exchange rate, "said Lian Ping, Chief Economist and Research Institute President of Zhixin Investment.
In Lian Ping's view, the periodic rebound of the U.S. Dollar Index is the direct reason for the depreciation of the RMB exchange rate. The supply and demand relationship of foreign exchange is an important market factor for the periodic fluctuations of the RMB exchange rate. Since the beginning of this year, the willingness of business entities to purchase foreign exchange has significantly increased, and the demand differentiation between foreign exchange purchase and settlement has widened. In the first quarter, the service trade deficit was the largest quarterly deficit since 2020. Driven by the demand for foreign exchange mainly through service trade, residents and enterprises' demand for foreign exchange has grown faster, thereby supporting the strengthening of the US dollar exchange rate. In addition, since the second quarter, the domestic economy has been operating weaker than expected, facing reduced support from the RMB exchange rate and increased pressure from interest rate cuts to devalue the RMB.
Zhou Maohua, a macro researcher in the financial market department of Everbright Bank, analyzed that recently the officials of the Federal Reserve expressed a "hawkish" attitude, which stimulated the market's expectation for the Federal Reserve to raise interest rates again in July, promoted the strength of the U.S. Dollar Index, and further disturbed the short-term trend of the RMB exchange rate. The differentiation of monetary policies between China and the United States has led to high interest rate differentials between the two countries, making it difficult to avoid short-term pressure on the RMB exchange rate, "said Pang Ming, Chief Economist and Research Director of Jones Lang LaSalle in Greater China.
According to relevant calculations, since the beginning of this year, the onshore RMB has depreciated by nearly 5% against the US dollar, while the offshore RMB has fallen by about 4.8% against the US dollar. Experts believe that the RMB exchange rate will not follow a linear unilateral trend in the future. After short-term external disturbances, the trend of the RMB exchange rate will eventually return to economic fundamentals.
Externally, although some factors may push the U.S. Dollar Index to continue to strengthen in the short term, it may be difficult for the US dollar exchange rate to continue to appreciate in the second half of the year. "In the medium and long term, the U.S. Dollar Index may weaken as the US economy gradually comes under pressure and the Fed's tightening policy is nearing the end. At the same time, the domestic policy is expected to kick off the" combination punch "and drive the economic fundamentals to bottom out and recover, thus supporting the RMB exchange rate to stabilize or even return to the appreciation channel." Mingming, chief economist of CITIC Securities, said.
Internally, China's fundamentals have returned to a positive trend and remain unchanged. With the increasing adjustment efforts of various policies such as monetary and fiscal policies, further consolidating the momentum of China's economic recovery, the fundamental support for the RMB exchange rate is expected to gradually strengthen, and China's foreign exchange market will continue to maintain stable operation, "said Pang Ming.
Lian Ping believed that the balance of payments surplus will continue to play a positive role in stabilizing the RMB exchange rate, and the internationalization of Internationalization of the renminbi will also increase the demand for RMB in the international market. In addition, it is expected that relevant departments will continue to improve the exchange rate management system, and if necessary, timely conduct market expectation management to avoid irrational depreciation of the RMB exchange rate.
The first meeting of the China Foreign Exchange Market Guidance Committee in 2023, held on May 18th, emphasized that in the next stage, the People's Bank of China and the State Administration of Foreign Exchange will strengthen supervision, management, monitoring and analysis, strengthen expected guidance, and if necessary, rectify pro cyclical and unilateral behavior to curb speculation and speculation. The second quarter regular meeting of the Monetary Policy Committee of the People's Bank of China held on June 28th in 2023 also pointed out that deepening the market-oriented reform of exchange rates, guiding enterprises and financial institutions to adhere to the concept of "risk neutrality", comprehensively implementing policies, stabilizing expectations, resolutely preventing the risk of exchange rate fluctuations, and maintaining the basic stability of the RMB exchange rate at a reasonable and balanced level.
The continuous correction of the RMB has not triggered any periodic capital outflow pressure. According to the briefing on foreign institutions' investment in the China Interbank Bond Market in May recently released by the People's Bank of China's Shanghai headquarters, as of the end of May, foreign institutions held 3.19 trillion yuan of inter-bank market bonds. This also means that in May, overseas institutions increased their holdings of China's interbank market bonds by about 20 billion yuan, marking the first increase since March this year.
Experts believe that currently, China's macroeconomic market, international balance of payments market, and foreign exchange reserve market are stable, and financial institutions, enterprises, and residents' expectations of exchange rates are generally stable, which is a solid foundation and strong guarantee for the smooth operation of the foreign exchange market. At the same time, the breadth and depth of China's foreign exchange market are increasingly expanding, with the ability to achieve independent balance. The RMB exchange rate also has corrective forces and mechanisms, which can maintain basic stability at a reasonable equilibrium level.
In the future, with the coordinated efforts of macroeconomic policies, China's economy will continue to rebound and improve, further enhancing its support for the foreign exchange market. The tightening cycle of monetary policies in major developed economies is approaching its end, and the strengthening of the US dollar is difficult to sustain. The impact of spillovers will gradually weaken. At the same time, China's foreign exchange market has shown new characteristics of increased resilience, and its ability to adapt to external environmental changes has significantly improved. China's cross-border funds The flow is expected to continue to remain stable and orderly Wang Chunying, deputy director of the State Administration of Foreign Exchange, said earlier.
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