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Break 7! The RMB exchange rate “breaks through the important barrier” and transmits six major signals.

2019-08-12

Early today (August 5th), there was a big news: the “FOB” of the RMB against the US dollar broke through 7 and once “depreciated” to 7.1092 (see chart below).

This is the first time that the offshore RMB price has broken 7 since 2008.

At the same time, the central parity of the yuan against the US dollar was reported at 6.9225 today, down 229 points, and this price also hit a new low since December last year.

As for the “carrying price” of the renminbi, there is also a large gap, which is currently reported at 7.0297, which also set a new low in 2008.

The following explains the “three prices” of the renminbi.

The median price is the daily reference price of the transaction announced by the China Foreign Exchange Trading Center. This price will refer to the previous day’s closing price, and will also refer to the latest changes in the international market, and also add the mysterious “counter-cycle factor”. Generally understood as “a price with a guiding nature.”

The CIF price is the actual transaction price of the China Foreign Exchange Trading Center, which is the price of domestic financial institutions based on the “mid-price” game. When we go to the bank to exchange dollars, we will also encounter a conversion price, which is usually based on the “bank price” and the bank’s handling fee.

The FOB price refers to the transaction price of the offshore market, mainly referring to the Hong Kong market. Here, the winds are high and the liquidity is relatively strong, so this price is more sensitive, but sometimes it is often “sounds and winds, and grass and wood are soldiers.”

Both the CIF and the FOB price broke 7, and the “7 era” of the RMB against the US dollar was officially announced!

Some people may ask, the US dollar has just cut interest rates, and the renminbi has not cut interest rates. Shouldn’t it be the depreciation of the US dollar and the appreciation of the renminbi?

Actually, I have pointed out in the column many times that the trend of the RMB exchange rate is not only affected by the spread of Chinese and foreign countries, but also by the impact of economic growth and the international trade environment. The United States suddenly announced last weekend that it would impose tariffs on more than US$300 million of US exports to the United States. This should be the direct cause of this break.

In fact, the exchange rate of the RMB against the US dollar has always been somewhat overestimated. Before that, China kept the strength of the RMB in order to reduce the trade imbalance between China and the United States. Now that the United States is rebellious, it loses the credit in the negotiations, and China does not need to “guarantee 7”.

Then the question comes: Will the RMB exchange rate continue to depreciate? How big is the future space? What impact will it have on the property market?

1. The future trend of the RMB exchange rate depends on the domestic and international economic situation, the global interest rate environment, and of course the progress of the big country’s game. 7 was once considered an important position. Now that it is broken, the flexibility of the renminbi has increased. In other words, the RMB exchange rate has finally lost an important “burden.” On the whole, due to the need to take care of other trading partners, the short-term depreciation of the RMB will not be too large. The Chinese government has always stated that it does not want to stimulate exports through devaluation and does not want competitive devaluation.

2. I have repeatedly expressed the following points in the column: Compared with China’s 3 trillion US dollars in foreign exchange reserves, the exchange rate level (guarantee 7) is actually not very important. If you want to protect, you should first “guarantee 3” (3 trillion foreign reserves). Now it seems that the country should put “guarantee 3” in a more important position, which is undoubtedly correct.

3. In the short term, the devaluation is a negative for the stock market. This is mainly psychological. In the medium and long term, moderate depreciation is conducive to stimulating exports. The overall economy is good, and most of the stock market is also positive. For example, it is beneficial to China’s export-oriented industries such as clothing, shoes and hats, but it may be bearish for related industries such as oil (aviation concept) and chips.

4. The moderate depreciation of the renminbi is conducive to alleviating the “valuation gap” between domestic and foreign real estate. It is beneficial for China to maintain the current stable housing prices. Those who sneak out to buy houses abroad will find that overseas real estate “has become more expensive”, which is beneficial to Keep the funds.

5. Does the individual need to change the US dollar? I still insist on the previous point of view. If you have actual needs in the future, if you have family members to study abroad, travel, overseas shopping, etc. in the short term, you can change some foreign exchange lock-in costs in advance. From the perspective of investment, if the exchanged US dollar cannot be invested abroad, and only the safe-haven value is changed, the investment value is not too big, and it is difficult to earn more than 10% within one year unless there is a black swan incident. If you are a defensive investor and don’t expect high investment returns, then it’s fine.

6. There is no need to be too pessimistic about the domestic stock market. The negatives from the trade have been digested almost. This time, it is basically “close to bad”, so the decline is a good opportunity to intervene because the current monetary policy is loose. After the break of 7 yuan, the interest rate cut of the RMB has been further vacated.


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