The media is always staring at the dollar, but the RMB index is "diluting the dollar", where is the contradiction?

The following is the data table of "weights of currencies" in the 2024 version of the CFETS RMB exchange rate index basket released by the China Foreign Exchange Trade System: Although the US dollar is still the most core currency in the RMB index, the weight given has increased from 19.831% in the previous year.

The weight of the euro was also lowered to 18.079% from 18.205% in the previous year, and the weights of currencies such as the South Korean won, the Japanese yen, the Australian dollar, the British pound, the Swedish krona, the Danish krona, the Norwegian krone, and the Thai baht were also lowered to varying degrees.

At the same time, the weights of currencies such as the Russian ruble, ringgit, Singapore dollar, Saudi riyal, Mexican peso, Canadian dollar, Turkish lira, and UAE dirham have been raised to varying degrees.

On the whole, the weight of the currencies of the western developed economies, led by the US dollar and the euro, has become more and more diluted, while the currencies of developing countries have become more and more important in the RMB index. This is the trend, and it has been a common phenomenon in recent years, with the RMB index staring at the diversification of currencies.

However, when our media mentions the depreciation and appreciation of the RMB exchange rate, they always emphasize the "dollar" and cannot see other currencies. So much so that Pan Gongsheng, governor of the mainland's central bank and director of the State Administration of Foreign Exchange, has repeatedly stressed that the renminbi is basically stable against a basket of currencies and has appreciated against non-dollar currencies.

Where is the contradiction between the two?

Before answering this question, it is necessary to understand how the weights of these 24 currencies in the Chinese RMB exchange rate index basket are distributed - the core principle is that China's "economic and trade linkages, taking into account entrepot trade factors, are calculated using the trade weight method."

In layman's terms, we don't care about how important the country's economy and trade are in the world, but only the extent of the country's economic and trade relations with China. The degree of economic and trade ties with the mainland is very high, and the renminbi focuses on "staring at its currency".

For example, British pounds, Korean won. The degree of internationalization of the British pound is far from being comparable to that of the Korean won, and it is several levels ahead. The UK's position in the global economic landscape is also far from being comparable to that of South Korea. However, the bilateral trade volume between China and South Korea is more than three times that of China and the United Kingdom.

For the mainland, the rise and fall of the South Korean won exchange rate directly affects the trade fluctuations between the mainland and South Korea, which in turn has an important impact on the overall foreign trade pattern of China. The impact of the fluctuation of the pound exchange rate is much smaller.

As a result, in the basket of currencies that the Chinese RMB exchange rate index is staring at, the Korean won is given a weight of 9.045%, ranking third. However, the weight given to the pound is only 2.657%, which is only in 12th place, a few notches lower than the Korean won.

From this, we come to the first point: the strong or weak fluctuation of the RMB exchange rate index focuses on "trade". A stronger renminbi index means that the currency exchange rate as a whole becomes stronger relative to major trading partners.

If the renminbi index is declining, it indicates that the renminbi is generally declining against the currencies of major trading partners. On the other hand, the dollar index only looks at the "euro, the yen, the pound, the Canadian dollar, the Swedish krona, the Swiss franc" and only six currencies of advanced economies.

The currencies of the United States' other important trading partners, including China, Mexico, Vietnam, Brazil, and India, are not included in the dollar index's currency basket – the dollar index is biased towards financial attributes, in contrast to the renminbi index's bias towards trade.

The direct reason for the dilution of the US dollar by the RMB index is that the financial attributes of the US dollar are getting stronger and stronger, and the trade attributes are getting lower and lower, while the exchange rate reform of the Chinese RMB focuses on trade. This is caused by the difference in the economic structure and industrial structure between China and the United States.

The RMB exchange rate index focuses on trade, and trade is the primary driving force in the process of internationalization by taking advantage of the advantages of the mainland's manufacturing industry and the advantages of the whole industrial chain to promote the acceleration of the pace of RMB internationalization.

From the perspective of other countries and regions, they are gradually trying and accepting the use of the renminbi, not because of how perfect China's financial environment is, nor because of how attractive China's stock market, bond market, and property market are.

On the contrary, China is still supervising under the capital account, and it is not easy for foreign capital to enter, and there are some restrictions on foreign capital going out. The real bright spot in China is manufacturing, and the core element that attracts other countries to use and reserve the renminbi is also the ability to provide high-quality and low-cost industrial goods.

Secondly, the world is becoming more and more diversified, and more and more countries hope to change the current poor and backward status, especially China's continuous rise, successfully achieving the world's second place in economic aggregate, and the scale, output value and added value of the manufacturing industry are the first in the world, full of brilliance.

In the near future, China's GDP will surpass that of the United States. China has set an example and given other countries and regions stronger confidence in development, and countries have gone to, approached and embraced China.

The ties that these countries and regions have strengthened with China are nothing more than science and technology, trade, culture, and finance. What is the trade and financial level? Of course, it is the renminbi, but should we still use the US dollar and the euro to connect?

Since the link is the RMB, the Chinese RMB exchange rate index must have its own characteristics. Its characteristic is that it points to the real economy, to manufacturing, to trade and trade. In this case, the renminbi must not only focus on the US dollar, but must dilute the US dollar.

Nan Sheng advises netizens in India and Vietnam, you don't have to wonder. The reform of the renminbi's exchange rate will continue, with a focus on national currencies with which China has important economic and trade relations. Sooner or later, the Vietnamese dong and the Indian rupee will be included in the basket of the renminbi index, and they will only be late, not less. This article is organized and written by Nansheng, please do not reprint or plagiarize without authorization!