In the foreign exchange market, the performance of the Chinese renminbi is very strong. The renminbi is trading at a four-year high against the dollar amid expectations of u.S. interest rate hikes and ukraine issues that have shaken emerging currencies. The background is that China's exports are in good shape, and funds are flowing into China's domestic capital market, and there is a view that sanctions against Russia will promote the use of the renminbi.
"I thought that after the Spring Festival, considering the us interest rate hike, the renminbi would tend to depreciate." But even when there is a Ukrainian problem, it is rarely sold, and the actual demand for renminbi is under great pressure to buy," said foreign exchange traders in Hong Kong. At the end of February, the exchange rate reached 6.30 to 6.39 yuan per DOLLAR, setting a record for the appreciation of the renminbi and the depreciation of the us dollar since April 2018.
If you look at the exchange rate of the renminbi against the US dollar and the two-year interest rate differential curve chart of China and the United States that represents the direction of monetary policy, you will find that the trend of the two is generally the same. From the perspective of market rule of thumb, when the interest rate differential between China and the United States widens, the renminbi will appreciate, and when the interest rate difference narrows, the renminbi will depreciate. However, at present, the interest rate of the United States is rising, the interest rate gap between China and the United States is narrowing, and the renminbi has not depreciated, and the linkage between the two is disengaged.
Iris PANG of ING Bank said the renminbi's strength was the result of money flowing into China's bond and stock markets. Chinese government bonds have been included in the UK's FTSE Russell major bond index since 2021, and foreign investors' holdings have increased to 1.8 times what they did two years ago. Chinese stocks have also been bought in large quantities due to expectations of the Chinese government's economic countermeasures, and as of February, overseas investors had achieved net buying for 17 consecutive months of trading through Hong Kong.
China's strong exports are also the main reason for the appreciation of the renminbi. China's trade surpluses for the full year of 2021 and December 2021 hit record highs. Exporters who obtain dollars need to convert them into renminbi. BNP Paribas argues that "on the one hand, China's trade surplus is at a high level, and on the other hand (the main reason for the depreciation of the renminbi) Chinese outbound tourism is stagnant." The renminbi will continue to strengthen in March."
Nor has the Ukraine issue triggered a sell-off of the renminbi. In general, in extraordinary times such as war, the currencies of new countries with higher risks are sold off, and funds are concentrated in the US dollar and Swiss franc, which are considered safe. Instead, the renminbi has appreciated in the case of Risk Off, and some people have pointed out that "the nature of the renminbi as a safe currency in Asia is increasing."
Bankers in Hong Kong were surprised to say that "there has been a sale of some assets from emerging market countries and the purchase of Chinese assets.".
Sanctions that remove Russia from the International Settlement Network (SWIFT) could also help expand the use of the renminbi to establish an independent settlement network. Zhou Hao, chief economist of Commerzbank, said that Russia has been actively reducing its holdings in the US dollar, while increasing its holdings in the euro, yuan and gold. In the next 5 to 10 years, there is no doubt that the rmb will be further increased.
David Chao of Invesco, a U.S. asset investment firm, pointed out that "over time, as a global settlement and stable store of wealth, [sanctions on Russia] will undermine trust in the dollar and have the potential to promote the internationalization of the renminbi."
According to SWIFT, the renminbi's share of international settlement reached 3.2% in January, surpassing August 2015 and setting a record high. Although it is lower than the US dollar and the euro, which account for nearly 40%, it has exceeded the share of the yen for two consecutive months. "Tensions between China and the United States will promote structural change and get rid of excessive dependence on the US dollar" (Standard Chartered Bank), and this aspect cannot be ignored.
But there are also many views that the renminbi is only slightly stronger, and it has not become a safe currency (Commerzbank Zhou Hao). China maintains strict capital controls and limits the outflow of renminbi. It is very different from the dollar, the axis currency that can be traded all over the world.
The Chinese government has begun to show vigilance against the appreciation of the renminbi. China's major state-owned banks implemented a move to buy dollars in the market on February 28, according to Reuters. Chinese min bank (central bank) set on March 2 for foreign exchange transactions benchmark value (the median price) also tends to depreciate the renminbi.
Capital Economics, a British research firm, pointed out that "Chinese Bank has shown dissatisfaction with the appreciation of the renminbi and may intervene to guide the depreciation of the renminbi.". Oxford Economics in the United Kingdom also predicts that the downward pressure on the renminbi will increase in the second half of 2022 according to the difference in the direction of financial policy between China and the United States, and the renminbi will depreciate to 6.42 yuan against the US dollar by the end of the year.
Nihon Keizai Shimbun (Chinese Edition: Nikkei Chinese.com) Yushi Kihara Hong Kong
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