The RMB exchange rate broke 7 again after two years! On the evening of September 15th, Beijing time, the exchange rate of the offshore RMB against the U.S. dollar fell below the “7” integer mark during the session, and the minimum depreciation was 7.0183. This morning, the onshore yuan traded at 7.0147 against the dollar, down 372 basis points.

What is the main reason for breaking 7 again?

This round of depreciation of the RMB against the US dollar is more driven by the strengthening of the US dollar.

Since August 12, the US dollar index has risen by 4.7%, while the onshore RMB exchange rate against the US dollar has only depreciated by 2.9%. During the same period, the CFETS index of the RMB against a basket of currencies has edged up by 0.1%. From a fundamental perspective, the recent strengthening of the dollar is the result of improved U.S. terms of trade and increased risk aversion amid expectations of a global recession. Due to the high proportion of high-tech products and energy in U.S. exports, after the outbreak of the epidemic in 2020, especially since the escalation of the conflict between Russia and Ukraine, the U.S. trade terms have improved significantly, which has pushed the dollar exchange rate to a certain extent. Although China's domestic demand has been weak recently, from the perspective of trade terms, the deterioration of China's terms of trade is obviously less than that of other major manufacturing countries such as Europe, Japan, and South Korea.

Strong exports have been a factor supporting the exchange rate so far this year, but China's trade surplus is likely to decline due to weaker external demand amid heightened recession risks overseas. "At present, overseas investors are indeed shorting RMB positions. The interest rate difference is a factor (the interest rate difference between China and the United States exceeds 70BP), but the more direct reason is that China's monetary policy orientation changed to cut interest rates in August."

There is no basis for continuous depreciation, and two-way fluctuations are normalized

On September 5, the People's Bank of China announced that from September 15, the foreign exchange deposit reserve ratio of financial institutions will be lowered by 2 percentage points, that is, the foreign exchange deposit reserve ratio will be lowered from the current 8% to 6%. This is the second time the People's Bank of China has lowered the foreign exchange deposit reserve ratio this year. This move is considered to have released a strong signal of "stabilizing the exchange rate".

Will the RMB continue to depreciate in the future? From a fundamental point of view, both the US dollar and the RMB deviate from the fundamentals. Despite aggressive rate hikes by the Federal Reserve, real interest rates remain in negative territory. The indicators released by the United States recently pointed to a slowdown in the economy. At the same time, the European Central Bank has also joined the ranks of aggressive interest rate hikes and tightening, which does not support the strengthening of the dollar. In terms of RMB, the domestic economy continues to recover, foreign trade remains resilient, cross-border capital flows in an orderly manner, and the balance of payments remains basically balanced; RMB asset valuation has advantages, and there is no basis for RMB depreciation. From the perspective of fundamentals and the attractiveness of RMB assets, the trend of RMB is optimistic during the year.

On September 15, the State Administration of Foreign Exchange announced the data on foreign exchange settlement and sales by banks and foreign-related receipts and payments by banks on behalf of customers in August this year. Wang Chunying, deputy director of the State Administration of Foreign Exchange and spokesperson, said that recently, against the backdrop of a strong dollar, non-US currencies have generally depreciated. In August, the settlement exchange rate (the ratio of customers selling foreign exchange to banks to customers' foreign exchange income), which measures the willingness to settle foreign exchange, was 71%, an increase of 3 percentage points from the monthly average this year, indicating that market players maintain a rational transaction of "foreign exchange settlement at rallies". The willingness to settle foreign exchange has been strengthened; the selling exchange rate (the ratio of customers’ purchase of foreign exchange from banks to customers’ foreign-related foreign exchange expenditures), which measures the willingness to sell foreign exchange, was 67%, which was basically the same as the monthly average since the beginning of this year, and the willingness of market players to purchase foreign exchange was generally stable.

The short-term strong dollar still has some pressure on the RMB, but it is expected that the RMB is expected to operate near the equilibrium level, and two-way fluctuations will be normalized. The domestic spread of the epidemic is under control, with the support of policies to ensure supply and price, bail out enterprises, and stabilize growth, and the domestic economy will recover steadily. This is the greatest certainty in the world. At the same time, my country's supply chain and industrial chain have recovered smoothly, the structure of foreign trade has been optimized, the quality and efficiency of foreign trade enterprises have been improved, and foreign trade has been resilient.