On September 28, the offshore USD/CNY exchange rate fell below 7.2, the lowest value of the RMB since the data was available in 2011; it was also the lowest value of the onshore USD/CNY exchange rate since 2008.
Recently, the RMB has been depreciating against the U.S. dollar. On September 15, the exchange rate of the U.S. dollar against the RMB broke through the psychological barrier of “7”. However, the depreciation accelerated after that, breaking through 7.2 in less than two weeks.
The rapid devaluation of the renminbi has also led to the intervention of the central bank in the foreign exchange market. Since September 28, the foreign exchange risk reserve ratio of forward foreign exchange sales business has been raised from 0 to 20%, but it has not prevented the breakthrough of 7.2 on the same day.
According to the analysis, an important reason for the sharp rise in the dollar is the large-scale tax reduction policy in the United Kingdom, which has caused the pound to plummet. On the evening of the 28th, the Bank of England came to the rescue and announced the temporary purchase of long-term British government bonds. On September 29, the USD/CNY exchange rate returned to 7.15, up more than 1,000 basis points from the lowest point.
It is worth mentioning that the RMB has depreciated against the US dollar, but the depreciation rate is only half of the appreciation of the US dollar index (the weighted average of the exchange rates of the US dollar against the six major international currencies) in the same period; the RMB has appreciated significantly against the euro, pound and yen. , is still a relatively strong currency in the international currency market.
The psychological barrier of “Protecting Seven”
For a long time, the exchange rate of RMB against the US dollar has had a psychological barrier of “guarantee seven”.
During the subprime mortgage crisis in 2008, the RMB appreciated sharply, and the exchange rate of USD/RMB fell from 7.8 to 6.8. In order to stabilize the RMB exchange rate, the People’s Bank of China pegged the US dollar to stabilize the RMB exchange rate at 6.8-6.89.
In 2016, the renminbi was under pressure to depreciate. The central parity rate of the US dollar against the renminbi once reached 6.96. The central bank of China used a large amount of foreign exchange to stop the exchange rate before the 7 yuan mark.
Since then, the market has formed psychological expectations for the “guarantee seven”, believing that the central bank will use policy measures to stabilize the exchange rate below this figure. Because once this threshold is breached, investors’ expectations for the future devaluation of the renminbi may be further amplified, which will accelerate the withdrawal of foreign capital, and the difficulty of stabilizing the exchange rate will be greatly increased.
On August 5, 2019, affected by the Sino-US trade war at that time, the exchange rate of RMB against the US dollar broke the 7 yuan mark, hitting a new low in more than 11 years.
At that time, central bank officials came forward to play down the meaning of “Breaking Seven”, saying that “7” was not an age, it would never come back in the past, nor was it a dam, and once it was breached by the flood, it would gulp down a thousand miles; During the water season, it will be higher, and it will drop again during the dry season. It is normal to have ups and downs.
After that, the RMB appreciated, reaching 6.3 at one point. On September 15 this year, when it “broken seven” again, the market reaction was not strong, but it fell sharply to 7.2 in less than two weeks, causing more discussion.
Factors Affecting Exchange Rates
An important factor that affects the exchange rate is the “supply and demand” relationship. As demand for the renminbi increases, its value will increase, and it will appreciate. There are many other factors, including:
- economy:When the economy is strong, the currency will be strong, because other countries want to invest and need the local currency to achieve this, which will increase the demand.
- Savings:For example, if the People’s Bank of China raises interest rates, if interest rates are raised, the attractiveness of saving and investing in RMB will increase because the rate of return is higher. In this way, the demand for RMB will increase. This round of dollar appreciation is due to the Fed raising interest rates.
- Treasury:The state of official bank accounts — or how much money is saved and owed — also affects the exchange rate.
- Speculation:Exchange rates are greatly influenced by currency speculators—people who buy and sell currencies based on the expected value of future events. In-day movements in exchange rates depend overwhelmingly on the actions of speculators, or their confidence in a country’s economic prospects.
Why is the dollar rising
Since the devaluation of the renminbi is due to the sharp rise in the dollar, why is the dollar rising so fast? Because the Federal Reserve has recently raised interest rates several times in order to control inflation.
After the Fed raises interest rates, it means higher interest returns and returns on financial assets, which will lead to the return of international funds from emerging markets to the US market.
For emerging economies, the outflow of US dollars will put their currencies under pressure to depreciate, and China is one of them.
But the devaluation is not without benefits. For China, a major manufacturing country, the devaluation of the renminbi is beneficial to China’s foreign trade orders. Because for other countries, the devaluation of the renminbi means that Chinese goods become cheaper and more competitive, which can attract more orders.
risk of devaluation
For emerging market countries, rapid currency devaluation hides huge risks.
For example, during the Fed rate hike cycle in 1994, the currencies of emerging market countries depreciated rapidly, especially Mexico. The currency depreciated sharply, the market panic spread, a large amount of capital flowed out of Mexico, and the balance of payments deteriorated, which directly led to the deterioration of the domestic balance of payments in Mexico. A massive currency crisis broke out.
In September 2018, the strengthening of the US dollar also brought a wave of devaluation of emerging market currencies.
According to Hu Rong, an assistant professor at the Chinese University of Hong Kong, the underlying reason is that after the 2008 financial crisis, emerging market countries took advantage of the depreciation of the dollar and borrowed more, far beyond their own affordability. So when the dollar appreciates and interest rates rise, they can’t pay it back, causing the currency and economy to collapse.
As far as China is concerned, the devaluation of the renminbi may stimulate capital outflows or put a lot of pressure on asset bubbles, so China does not want the renminbi to depreciate too quickly.
Chen Li, chief economist of Chuancai Securities, also wrote an analysis that the devaluation of the renminbi will have a wide range of impacts on China’s economy and society – firstly, foreign capital may flow out of China’s capital market due to intensified exchange rate fluctuations, and secondly, the depreciation pressure of assets denominated in renminbi will increase. It is not conducive to the long-term development of China’s import industry.