Since the “8.11” exchange rate reform in 2015, the RMB exchange rate has broken through 7.0 in 2 times. How will the future go?
Uncertainty in the expected exchange rate of the RMB
Looking back at the process of depreciation of the Renminbi exchange rate twice, it is clear that the expected changes in China’s economic outlook are the basis for determining the depreciation of the RMB exchange rate to the near 7.0 mark.
During the end of 2016, the strong expectation of RMB exchange rate “breaking seven” came from the high bubble of the property market at that time, the market worried about China’s economic transformation and growth prospects. At that time, the popular international participation experience was: Russia kept the house price drop rate Japan held the exchange rate and lost its property market. For China’s property market and exchange rate changes, as well as China’s economic prospects, some institutions at the extreme pessimistic end think that China’s property market and foreign exchange market are difficult to hold, and policy resistance is only “dull knife” or “razor” for the Chinese economy. problem.
In the third quarter of 2018, the “breaking seven” expectations of the RMB exchange rate again came from concerns about the intensification of Sino-US trade disputes. This concern affected the market’s expectations of China’s economic prospects, which led to a series of related reactions. The worries of rising financial risk exposure in China have been heated up. The exchange rate depreciation, as a form of risk exposure, has had an impact on the foreign exchange market through the market’s expected self-realization mechanism.
However, the two RMB exchange rate depreciation movements, when the market faced a strong “breaking seven” expectations, all came to an abrupt end, and rebounded again, and did not depreciate at a low point (nearly 7 positions), forming a platform. It can be said that the two depreciation of the RMB exchange rate presents a typical “one wave of three folds”: 2016, 2017, and 2018.
During the period of 2016-2018, there is a consistent unilateral continuation or stagnation in the year, that is, in the process of each spurt or squat, there is basically no sideways consolidation, which indicates the market level of the RMB exchange rate in the past three years. The equilibrium point has not been formed. The RMB exchange rate does not know which interval is the market equilibrium zone. That is, the “resistance level” and “support level” of the market operation itself are far from being formed, indicating that the RMB exchange rate market is still waiting for time to precipitate. Mature market. This is in the foreign exchange market with the major international currencies such as the US dollar, the euro and the Japanese yen. There is a historical “equilibrium zone” of market operation, which is fundamentally different, which means that the RMB exchange rate is more likely to form unstable expectations in the market.
However, the author has always asserted that China implements a managed floating exchange rate system. In the language of the market, it is a regulated exchange rate. In the absence of open capital projects, exchange rate control is effective, that is, the government has absolute Control.
The fact that the RMB exchange rate is close to 7 and not broken shows that in the target system of the exchange rate policy of the Chinese monetary authorities, preventing the market from forming a continuous depreciation expectation is an important bottom line for exchange rate management.
Policy Expectations for RMB Exchange Rate Management in 2019
The People’s Bank of China stated at the “two sessions” that the exchange rate will not become a tool for trade dispute response, and will not engage in competitive depreciation; it will adhere to the exchange rate formation mechanism based on market supply and demand, and tolerate market fluctuations and a certain degree of flexibility. Regarding the market exchange rate, the central bank believes that the exchange rate is now more stable.
The author believes that from the actual trend of the exchange rate, the market equilibrium range of the RMB exchange rate is obviously not at the current point: from February 11 to March 12 after the Spring Festival, the spot exchange rate of the RMB against the US dollar runs at 6.78-6.68, continuing. Step by step from November 2018, step by step downward trend!
According to the latest monetary policy implementation report of the central bank (Q4 2018), the goal of the exchange rate policy is to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level. From the description of exchange rate stability by central bank officials at the two sessions, exchange rate stability = market volatility + automatic stability. But where is the equilibrium point?
The exchange rate should converge to a stable point in the volatility, which means that the exchange rate has a market equilibrium point. However, in terms of the history of the existing market trend, the RMB exchange rate is unlikely to have a stable equilibrium with the mainstream expectations, and the RMB exchange rate market There is no equilibrium operating area that the market entity has consistently expected.
History has not formed and does not mean that the market does not exist. Then, is there an objective equilibrium point in the RMB exchange rate, like the gravitation of the earth, attracting the RMB exchange rate to approach it, and converge it in the context of the world economy and international financial stability?
From the analysis of economics, Purchasing Power Parity (PPP) is a more suitable indicator to measure the actual purchasing power of two currencies. In fact, the World Bank has statistics and comparisons based on PPP for economic statistics of various countries. And at the same time, it is published together with the national economic statistics under the exchange rate law. However, from the relationship between market exchange rate and PPP, the market exchange rates of various countries (including the RMB exchange rate) do not revolve around the trend of PPP fluctuations.
Even in the history of long-term fluctuations in the market exchange rate, there is an international currency with a clear equilibrium zone. The relationship between the market exchange rate and PPP is also unstable, and frequent volatility often occurs. It can be seen that from the perspective of market operation itself, the exchange rate formation mechanism has to achieve automatic balancing effect, which is quite difficult. As an important component of the financial market, the exchange rate market has the operational characteristics of all financial markets: it is expected to be automatically confirmed, and the price continues to move under the expected effect until the expected reversal. It can be seen that in the exchange rate market, it is more important to expect management than to maintain monetary value.
Whether in 2016 or 2018, the continued depreciation of the renminbi at that time could only take place under the tolerance of the Chinese monetary authorities. China’s financial system is a bank-led financial system. Compared with the market-based financial system, under the bank-led financial system, the monetary authorities have a more direct and significant impact on the credit creation of the financial system, and thus have more control; Although China’s interest rate marketization process has made a big progress, the market interest rate system is basically directly related to the monetary authorities. There is still a long way to go in the interest rate “two tracks and one track”, in the basic market of money market interest rates. At the same time of marketization, the interest rate system of the credit market is also deeply affected by the policy interest rate (the benchmark interest rate for deposits and loans).
In 2016, the original intention of the Chinese central bank to allow the exchange rate to depreciate was to increase the market volatility of the exchange rate and increase the marketization of the foreign exchange market; in 2018, allowing exchange rate fluctuations is a direct impact on the foreign trade enterprises and the Chinese economy. However, when the two depreciation processes affected the market expectations and the market depreciation expectations were not expected, the monetary authorities adopted a countercyclical adjustment and successfully reversed the trend and expectations of the market exchange rate. The policy purpose of improving the marketization degree of the foreign exchange market is to create a favorable exchange rate management market environment for enterprises. The purpose of this policy will last for a long time and will continue to be implemented in 2019.
In 2019, the RMB exchange rate will once again turn to unilateral appreciation
From 2016 to 2018, the RMB exchange rate experienced a three-stage change of 贬-升-贬, which was basically a one-way movement during the year. Continuing the trend of the previous three years, the RMB exchange rate showed a significant one-way appreciation trend from January to March 2019. The author believes that based on changes in the international economic, financial and policy political environment, the RMB exchange rate will continue to appreciate unilaterally in 2019. After the “8.11” exchange rate reform, there was a “breaking seven” expectation that existed in 2016 and 2018. Will not reappear in 2019!
In 2019, the Chinese economy will present a unique situation in the landscape of the world economy. China’s economic operation will show signs of a bottom-up phase that has continued for six years. At the same time, the growth of economies in developed countries such as the United States and Europe will continue the current slowdown. The Chinese economy has to go through the “bottom squat” phase of a long period of time. This is the judgment that the author has made since 2012.
In 2019, with the steady recovery of Chinese investment, the Chinese economy will gradually move from the bottom. For the United States, due to the tax cuts in the previous two years, the return of overseas funds is coming to an end. As the function of the US financial system has not recovered, the withdrawal of the US currency and the continuous rate hike process have had a certain impact on the economic development of the United States. The European economy was deeply affected by the Brexit, the political shock of France, Germany and Italy, the economic differences between countries in the euro zone and the contradictions between unified fiscal and monetary policies. The economic growth momentum has not been able to Effectively improved.
Judging from the international financial situation, with the pause in the US interest rate hike process, the spread of interest rates between China and the United States has continued to ease, and the expectation of the RMB exchange rate depreciation based on the interest rate parity logic will also fade. After the 2008 crisis, the abnormal stock market of the US stock market for 9 years was not because the economy was “strong” but “continuously shrinking” – during the period of 2003-2017, the US stock market shrank at an average annual rate of 1.5%, after the crisis. The loose monetary environment has brought about an extraordinary decline in market interest rates, which has directly led to the acceleration of the “privatization” process in the US capital market. The cumulative effect of the US’s previous interest rate hikes has significantly raised the bond interest rate. In addition to the slowdown in overseas return capital, the “privatization” process of the US stock market has nearly stopped, and the probability of reversal of the stock market has increased significantly. Therefore, in 2019, the attractiveness of the United States to international capital will be greatly reduced.
From the perspective of international policy coordination, both China and the United States have the needs and motives for resolving trade disputes. They are all committed to resolving differences and developing good economic and social relations such as trade and investment between the two countries. On the other hand, the struggle between President Trump and the parliament in the United States has always given priority to the United States. Regardless of the traditional practices and rules of communication with its history, the uncertainty of the US policy and the international incompatibility have increased. These political aspects The factors in the context of changes in the international economy and finance will inevitably exacerbate the volatility of the US dollar index.
The confirmation of the “stable and upswing” of the renminbi is the market foundation for the renminbi internationalization to be effectively promoted. If China wants to continue to push forward the renminbi internationalization strategy, it must create this market base.