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Hello everyone, today I would like to talk to you about the RMB exchange rate. Recently, there has been a clear depreciation trend in the RMB exchange rate, which has attracted widespread attention. In the past two years, the renminbi has broken through the 6.96 mark against the dollar for the first time, which means that the pressure to depreciate the yuan is increasing. So, why is the renminbi depreciating? Is foreign capital leaving? How does the depreciation of the renminbi affect us? How should we deal with this situation?
First, let's analyze the reasons for the depreciation of the renminbi. One of the main reasons for the depreciation of the renminbi is that the interest rate differential between China and the United States is gradually narrowing. This difference is mainly due to the misalignment of the economic cycles of the two countries. China recovered relatively quickly from the shock of the pandemic in 2020, but for more than two years, the Chinese economy faced repeated pressures from the real estate market and the pandemic. As a result, the People's Bank of China has been cutting interest rates to stimulate economic growth.
At the same time, inflation in the United States has risen, especially the inflation indicator PCE has remained above 6%, so the Fed has taken measures to raise interest rates to reduce the overheated economy. This difference between rising and falling interest rates has led to the depreciation of the renminbi. To illustrate with an example, suppose there are two wealth management products in the market, where A has a lower risk but has a yield of 3%, while B has a higher risk but a yield of 5%. If A's yield rises to 4%, then investors may be inclined to choose A, causing demand for B to fall, which in turn lowers the price of B. This is also a principle of the depreciation of the RMB exchange rate.
In addition, the depreciation of the renminbi is also under pressure from the withdrawal of foreign capital. China's government bonds have long been popular with foreign investors because U.S. Treasuries are denominated in dollars, the world's main settlement currency. Therefore, in order to attract funds, the yield on Chinese government bonds is relatively high. However, as the Fed begins to raise interest rates and China cuts interest rates, China's attractiveness to foreign investment decreases, and foreign capital may gradually withdraw, putting pressure on the renminbi exchange rate.
What impact does the depreciation of the renminbi have on us? First, it has a bearish impact on the stock and housing markets. The Fed's interest rate hike policy has put pressure on U.S. stocks, which will cause some foreign investors to withdraw from the A-share market and return to the U.S. market. In addition, the depreciation of the renminbi will also accelerate the outflow of foreign capital, thereby further depressing the renminbi exchange rate and forming a vicious circle. In addition, the withdrawal of foreign capital will also limit the space for the People's Bank of China to release water, because further interest rate cuts may lead to faster foreign capital leaving, thereby exacerbating the depreciation of the renminbi and slowing the economic recovery.
The same logic applies to the housing market. As the People's Bank of China printed less money, so did the flow of money into the housing market, thus curbing the rise in house prices. In addition, the depreciation of the renminbi has a negative impact on Chinese concept stocks listed overseas, as their revenues are denominated in renminbi, but their share prices are denominated in dollars and Hong Kong dollars.
However, the depreciation of the renminbi has had a positive impact on exporting companies. As the renminbi depreciates, China's exports become more competitive because the same amount of renminbi can be exchanged for more dollars. This will increase the competitiveness of Chinese export enterprises and is a positive factor for them.
On the other hand, the depreciation of the renminbi has adversely affected imports. When we buy foreign goods or services with the same amount of RMB, we can get less value. This will put pressure on rising costs for industries that rely on imported raw materials. For example, China's dependence on lithium resources exceeds seventy percent, so if the renminbi continues to depreciate, the price of lithium batteries will rise, which will have a negative impact on the new energy vehicle industry.
So, how should we respond to the depreciation of the renminbi? The People's Bank of China has a variety of tools to maintain the stability of the renminbi's exchange rate. First, it can manage market expectations with verbal warnings, deterring institutions trying to short the yuan. Second, central banks can resort to exchange rate instruments, such as lowering the reserve requirement ratio for foreign exchange, to increase the foreign exchange funds that banks have on hand, thereby reducing the demand in the foreign exchange market. In addition, the central bank can also adopt direct transactions, such as issuing offshore central government notes, to recover the renminbi in the offshore market.
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