The impact of Asian currency depreciation on the renminbi is multifaceted, with the potential for negative impacts and the potential to be mitigated by China's policy adjustments and the support of economic fundamentals.
The depreciation of Asian currencies will lead to higher import costs, which in turn will push up domestic prices and put pressure on the lives of ordinary people. In this case, if the renminbi also faces depreciation pressure, then for Chinese consumers, the price of imported goods will rise, increasing the cost of living. At the same time, the depreciation of Asian currencies is likely to increase China's external debt burden, especially for Chinese companies that use these currencies heavily for trade and investment.
However, the People's Bank of China has taken a series of measures to stabilize the RMB exchange rate and maintain its basic stability at a reasonable equilibrium level. This includes smoothing the monetary policy transmission mechanism, improving the efficiency of capital use, and deepening the market-oriented reform of the exchange rate. In addition, a report released by the People's Bank of China shows that the exchange rate of the RMB against a basket of currencies has remained stable and rising, indicating China's ability to resist external shocks and maintain the stability of the RMB exchange rate through policy means.
More importantly, the strong recovery of China's economy has provided solid support for the RMB exchange rate. China's economy has a high contribution to global economic growth, which helps to strengthen market confidence in the RMB. At the same time, the declining correlation between the renminbi exchange rate and the U.S. dollar index reflects that the renminbi exchange rate is more dominated by factors such as the domestic economy, which means that even if other Asian currencies depreciate, the stability of the renminbi may not be affected much.
While the depreciation of Asian currencies may have a negative impact on the RMB, the Chinese government has taken a number of measures to stabilize the RMB exchange rate, and the strong recovery of the Chinese economy has provided solid support for the RMB exchange rate. Therefore, it can be assumed that the impact of Asian currency depreciation on the RMB is limited.
What specific measures has the People's Bank of China taken to stabilize the RMB exchange rate?
The People's Bank of China has taken a variety of specific measures to stabilize the RMB exchange rate. First of all, the People's Bank of China and the State Administration of Foreign Exchange emphasize adjusting based on market supply and demand with reference to a basket of currencies, which shows the importance and use of market mechanisms. Second, tightening offshore RMB liquidity through the issuance of offshore central bills in Hong Kong is a way of direct intervention in the foreign exchange market. In addition, the People's Bank of China (PBoC) also regulates the RMB exchange rate by adjusting the foreign exchange reserve ratio of financial institutions to affect the supply of foreign exchange.
Within the broader policy framework, the PBOC has implemented a range of monetary policy tools, including RRR cuts, targeted interest rate cuts, and the use of structural tools such as the PSL (Policy Special Loan) and MLF (Medium-Term Lending Facility), which are designed to support economic recovery and boost market confidence. At the same time, the management of foreign exchange reserves is also one of the important means to maintain the basic stability of the RMB exchange rate, and to make up for the gap between foreign exchange supply and demand by selling foreign exchange reserves.
In order to further strengthen the guidance of expectations and stabilize exchange rate expectations, the People's Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) have decided to raise the macro-prudential adjustment parameters for cross-border financing of enterprises and financial institutions, which will help prevent sharp fluctuations in the exchange rate. In addition, the People's Bank of China (PBoC) has withdrawn from regular intervention and left the RMB exchange rate largely determined by the market, a step towards a more market-oriented exchange rate formation mechanism.
The People's Bank of China has stabilized the RMB exchange rate through a series of comprehensive measures, including but not limited to adjustment on the basis of market supply and demand, direct intervention in the foreign exchange market, adjustment of the foreign exchange reserve ratio of financial institutions, implementation of monetary policy tools, management of foreign exchange reserves, and strengthening guidance of expectations.
What are the latest data and forecasts for China's economic recovery?
The latest data on China's economic recovery showed that gross domestic product (GDP) for the whole of 2023 increased by 5.2% year-on-year. Entering 2024, GDP grew more than expected to 5.3% in the first quarter, showing that the economy is off to a good start. In addition, investment in fixed assets increased by 4.5 percent year-on-year in the first quarter, and investment in high-tech industries increased by 11.4 percent year-on-year, reflecting rapid economic growth and improving quality and efficiency.
For future forecasts, some research reports predict that China's economic growth will rise to 5.3% in 2024 from 5.2% in 2023, and predict that the economic growth rate will be 4.9% in 2025. This forecast is based on factors such as strong domestic demand pushes, rising household incomes and a recovery in investment. The Asian Development Bank also raised its forecast for China's economic growth this year to 4.8 percent from 4.5 percent in December, signaling optimism among international institutions about China's growth prospects.
China's economy grew by 5.2% in 2023 and continued its momentum in the first quarter of 2024 at 5.3%. Economic growth is expected to continue to be stable in the coming years, albeit with fluctuations. These data and forecasts reflect the good momentum of China's economic recovery and the confidence of the international community in its growth prospects.
What is the specific performance and future trend of the RMB exchange rate against a basket of currencies?
In 2023, the exchange rate of the renminbi against a basket of currencies showed a slight weakening trend. According to the "2023 RMB Exchange Rate Annual Report" released by the China Business Research Institute, the RMB nominal effective exchange rate index decreased by 1.86%, and the CFETS RMB exchange rate index also decreased from 98.7 to 97.4, a decrease of 1.27%. This indicates that in 2023, the value of the renminbi relative to a basket of currencies has decreased.
Both the People's Bank of China and the State Administration of Foreign Exchange pointed out that although the RMB exchange rate experienced volatility in 2023, it has generally maintained a relatively stable performance and has shown stability among major global currencies. This stability is due to the automatic adjustment of China's macroeconomy and balance of payments.
As for the future trend, some experts predict that based on the fundamentals of the RMB exchange rate, the RMB exchange rate against a basket of currencies will continue to be relatively stable in the past few years in the next few years. In his analysis, Zhang Ming proposed that the exchange rate of the RMB against the US dollar by the end of 2024 may be around 7, while the effective exchange rate index of the RMB against the CFETS currency basket is about 100, showing a cautious optimism.
Although the RMB exchange rate against a basket of currencies has weakened slightly in 2023, the RMB exchange rate has maintained a relatively stable performance overall, and it is expected to remain relatively stable in the coming years. This forecast is based on the fundamentals of the RMB exchange rate and China's macroeconomic and balance of payments self-adjustment.
What are some specific examples of the impact of Asian currency depreciation on Chinese companies?
The impact of the depreciation of Asian currencies on Chinese enterprises, especially export enterprises, is mainly reflected in the following aspects:
- Decline in export revenues: The depreciation of the RMB exchange rate means that export revenues denominated in US dollars will be reduced when converted into RMB, which is a direct financial loss for exporters. Although the depreciation of the renminbi could theoretically increase the earnings of exporters, in practice this increase was not enough to boost sales.
- Increased bargaining pressure: The depreciation of the renminbi has led to increased price competitiveness of exporters in the international market, but this may also lead to customer requests for price reductions, which in turn increases the bargaining pressure of firms.
- Impact on foreign trade import and export: The fluctuation of the RMB exchange rate has had a significant impact on mainland foreign trade import and export enterprises. On the one hand, the depreciation of the renminbi is conducive to increasing the export earnings and voice of export enterprises, and on the other hand, for importers, the depreciation of the renminbi increases the cost of imports, especially for those enterprises that rely on large quantities of imported raw materials or components.
- Changes in the global market competition pattern: The RMB has depreciated less than the currencies of other Asian countries, while the currencies of export-oriented countries such as Japan, South Korea, and Vietnam have depreciated too much, and their price competitiveness in the global market has exceeded that of Chinese enterprises. This could lead to goods from these countries becoming more popular in international markets, potentially impacting the exports of Chinese companies.
The depreciation of Asian currencies has had a multifaceted impact on Chinese firms, especially exporters, including declining export revenues, increased bargaining pressure, increased import costs, and changes in the competitive landscape of the global market. These impacts can be both positive and negative, and companies need to adopt strategies to address these challenges.
How to evaluate the correlation between the RMB exchange rate and the US dollar index?
Changes in the correlation between the RMB exchange rate and the US dollar index can be evaluated from multiple perspectives. First of all, according to the data of the "2023 Interbank Foreign Exchange Market Operation Report", the correlation between the RMB exchange rate and the US dollar index in 2023 is 39.9%, a significant decrease of 50.1 percentage points from 2022. This indicates that in 2023, the correlation between the changes in the RMB exchange rate and the US dollar index will be significantly reduced, indicating that the independence and stability of the RMB exchange rate have been enhanced.
From the perspective of influencing factors, the exchange rate of the RMB against the US dollar is affected by a variety of factors, including long-term factors such as balance of payments, inflation, interest rate levels and exchange rate policies, as well as short-term factors such as speculative activities and major economic and political events or economic data. The complexity and volatility of these factors may cause the correlation of the RMB exchange rate to fluctuate with the US dollar index.
In addition, the volatility of the US dollar index is one of the key external factors affecting the RMB exchange rate. This means that the correlation between the RMB exchange rate and the US dollar index may change under the influence of the global economic environment and US dollar policy. For example, if the U.S. dollar index rises because of the growth of the U.S. economy or other reasons, then the value of the renminbi against the U.S. dollar may fall, and vice versa.
However, it is important to note that although the correlation between the RMB exchange rate and the US dollar index may be higher in some periods, this correlation is not fixed. For example, some studies have shown that there is a strong positive correlation between the central parity of the RMB exchange rate and the US dollar index for a certain period of time, with a correlation coefficient of 0.898. However, subsequent analyses have shown that this correlation may vary over time.
Changes in the correlation between the RMB exchange rate and the US dollar index reflect changes in the economic policies of both countries, the global economic environment, and the expectations of market participants. While there may be some correlation in the short term, in the long term, this correlation may fluctuate and change due to a variety of internal and external factors. Therefore, when evaluating the correlation between the RMB exchange rate and the US dollar index, it is necessary to consider a variety of factors and pay attention to its trend over time.