Recently, the offshore RMB exchange rate has continued to fall, from December 8, as of 11:03 on December 11, two trading days, a cumulative decline of 309 points, approaching 7.2000, reported at 7.1939. Does this indicate that the offshore RMB exchange rate can be expected to return to the era of 7.2 yuan?
International economic situation: new crown epidemic, trade frictions, inflationary pressures
As an international currency, it is inevitable that the RMB exchange rate will be affected by the international economic situation. In 2023, the world economy is facing multiple challenges, the most important of which is the continued spread and mutation of the new crown epidemic.
According to the World Health Organization, as of December 11, the cumulative number of confirmed cases worldwide has reached more than 250 million, with more than 5 million deaths. Although many countries have launched vaccination plans, there are still problems such as vaccine effectiveness, coverage, and distribution equity, resulting in increased uncertainty in epidemic prevention and control. The continuation of the epidemic has affected the economic recovery process of various countries, and has also exacerbated global trade frictions and geopolitical risks.
In particular, although the first phase of the trade agreement between China and the United States was signed in 2022, differences between the two sides on issues such as technology, human rights, and Taiwan still exist, leading to the escalation and recurrence of the trade war. All these factors have put some pressure on the RMB exchange rate, making it difficult for it to maintain stability and appreciation.
On the other hand, in 2023, the world is also facing rising inflationary pressures. Due to the impact of the pandemic, governments around the world have adopted massive fiscal stimulus and monetary easing policies to support the economy and employment. However, this has also led to a global oversupply of money and the formation of asset price bubbles, which in turn have pushed up the price levels of goods and services.
According to the International Monetary Fund, global inflation will reach 3.9% in 2023, the highest level since 2011. The rise in inflation will not only affect the purchasing power of consumers, but also the direction of monetary policy of central banks. If central banks raise interest rates or tighten monetary policy in order to curb inflation, it will have an impact on the RMB exchange rate, as it will increase the attractiveness of the US dollar and lead to capital outflows from the RMB market.
U.S. dollar index: a strong rebound, weighing on the yuan exchange rate
The U.S. Dollar Index is a measure of the value of the U.S. dollar relative to a basket of other major currencies, and it reflects the international competitiveness and demand for the U.S. dollar.
There is a negative correlation between the US dollar index and the RMB exchange rate, that is, the US dollar index rises, the RMB exchange rate falls, and vice versa. In 2023, the U.S. dollar index showed a strong rebound, rising from 89.2 at the beginning of the year to 94.5 on December 11, an increase of 5.9%. This was mainly due to the better-than-expected recovery of the US economy and the shift in the Federal Reserve's monetary policy.
The U.S. economy has shown strong growth momentum in 2023, mainly due to factors such as the promotion of vaccination, the support of fiscal stimulus, and the recovery of consumer confidence. According to the U.S. Department of Commerce, the gross domestic product (GDP) of the United States increased by 6.7% year-on-year in the third quarter of 2023, higher than the market expectation of 6.5%.
The unemployment rate in the United States also fell to 4.2% in November from 6.3% at the beginning of the year, approaching pre-pandemic levels. The U.S. economic performance has boosted the credibility and attractiveness of the U.S. dollar, making it the safe-haven and preferred currency for global investors.
On the other hand, the Fed has also adjusted its monetary policy orientation in 2023, shifting from easing to tightening. As inflation in the United States has been at a high level in 2023, it reached a 39-year high of 6.8% in November. This is well above the Fed's 2% target and has also raised concerns about runaway inflation.
In response to inflationary pressures, the Federal Reserve announced at its December monetary policy meeting an accelerated pace of tapering of its $120 billion monthly asset purchase program, from $15 billion per month to $30 billion per month.
This means that the Fed will end its quantitative easing policy in March 2024, paving the way for interest rate hikes. The tightening of the Federal Reserve's monetary policy has raised the level of interest rates and expectations in the United States, thereby strengthening the appreciation momentum of the dollar and weighing on the RMB exchange rate.
China's economic fundamentals: steady and progressive, supporting the RMB exchange rate
Although the RMB exchange rate has been pressured by the international economic situation and the US dollar index, the fundamentals of China's economy are still stable and progressive, providing some support for the RMB exchange rate. In 2023, China's economy has shown strong resilience and vitality under the impact of the epidemic, and has achieved high-quality growth.
According to the National Bureau of Statistics, in the first three quarters of 2023, China's GDP grew by 8.1% year-on-year, higher than the global average of 5.9%. China's major fields such as industry, services, and agriculture have maintained steady growth, especially in the fields of emerging industries, high-tech industries, and green industries, which have shown a relatively rapid development speed, providing impetus for China's economic transformation and upgrading.
China's consumption, investment, export and other demand have also rebounded, especially the contribution rate of domestic demand continues to increase, showing the endogenous momentum and resilience of China's economy. China's economic growth is not only quantitative but also qualitative, reflecting the strong strength and potential of China's economy.
China's abundant foreign exchange reserves provide a stable backing for the RMB exchange rate. China's foreign exchange reserves stood at $3.2 trillion at the end of November 2023, an increase of $6.7 billion from the previous month and the fifth consecutive month of growth, according to the China Foreign Exchange Trade Center. China's foreign exchange reserves rank first in the world, far exceeding the appropriate level recommended by the International Monetary Fund, providing sufficient guarantees for the stability of the RMB exchange rate.
China's balance of payments is in good condition, providing favorable conditions for the renminbi exchange rate. According to the State Administration of Foreign Exchange, in the first three quarters of 2023, China's balance of payments surplus was $1.1 trillion, up 15.8% year-on-year.
Among them, China's surplus in trade in goods was US$4.6 trillion, up 18.5 percent year-on-year, and China's deficit in trade in services was US$1.5 trillion, down 14.8 percent year-on-year. China's balance of payments surplus reflects China's economic competitiveness and balance of payments capacity, providing room for the appreciation of the renminbi exchange rate.
epilogue
The trend of the RMB exchange rate is affected by a variety of factors, both pressure and support. From the perspective of the international economic situation and the US dollar index, the RMB exchange rate is facing certain downside risks and may return to the 7.2 yuan era.
However, from the perspective of China's economic fundamentals and the opening of the financial market, the RMB exchange rate still has a solid foundation and will not fluctuate or depreciate significantly. Therefore, we believe that the future trend of the RMB exchange rate will be a process of balance and adjustment, which will neither blindly appreciate nor fall all the way, but will fluctuate and adjust moderately according to changes in market supply and demand and economic fundamentals.
Therefore, when investors pay attention to the trend of the RMB exchange rate, they should not blindly follow the trend or panic, but should rationally analyze and judge, and make reasonable choices according to their own risk appetite and investment goals.