in a longer period, after the exchange rate reform in 25, the RMB began to appreciate and continued to appreciate until 213. Since July 21, 25, the central bank announced that China began to implement a managed floating exchange rate system based on market supply and demand and with reference to a basket of currencies. Since then, the RMB exchange rate is no longer pegged to a single dollar, but refers to a basket of currencies, but referring to a basket of currencies does not mean pegged to a basket of currencies to achieve managed floating. From the trend point of view, the RMB has greatly appreciated against the US dollar after the exchange rate reform in 25, from above 8.2 to near 6. in 13 years, and the real effective exchange rate index of RMB has also risen from 85 to near 12.
The driving force behind the appreciation is the improvement of China's economy and international competitiveness. After China joined the WTO in 21, the economy achieved rapid growth, and it remained above 8% in most years. In terms of balance of payments, the current account surplus remained at a high level, and the opportunities brought by China's high economic growth also attracted the inflow of overseas investment funds. Until 14 years ago, the financial accounts basically maintained a surplus. Especially after the financial crisis in developed economies in 28, international capital flowed into emerging economies represented by China. Therefore, the appreciation of RMB exchange rate in 25-13 is fundamentally supported, and it is the gradual release of unilateral appreciation pressure that was suppressed for many years before the exchange rate reform in 25.
however, in 14-16 years, RMB began to face depreciation pressure again. On the one hand, China's domestic economy has started to weaken, and the market is very worried about the future trend. On the other hand, in 14 years, the Federal Reserve announced its withdrawal from QE and started the process of normalization of monetary policy, which means that the monetary policy in the United States began to tighten under the background of continuous economic improvement. During the "811" exchange rate reform in 14 to 15 years, almost all developed and emerging currencies depreciated sharply against the US dollar, while only the RMB was closely pegged to the US dollar, which accumulated depreciation pressure. Therefore, after the 15-year exchange rate reform, the RMB began to release depreciation pressure again. The exchange rate against the US dollar depreciated from 6.2 to the level close to 7. at the end of 16 years, and the real effective exchange rate of RMB dropped from 13 to 122.
In the past 17 years, RMB has started a new round of appreciation. The exchange rate of RMB against the US dollar rose from 6.96 at the beginning of 17 years to around 6.3 at present, and the CFETS RMB exchange rate index rebounded from 94.83 to 95.82. However, from a fundamental point of view, China's economic growth rate only rebounded from 6.7% in 16 years to 6.9% in 17 years, and the foreign exchange reserves and foreign exchange holdings reflecting the balance of payments only remained stable and did not increase significantly. At present, the European and American economies are still recovering, and the domestic economy even has some weakening pressure. Therefore, from the current forward market, the RMB has certain depreciation expectations against the US dollar.
therefore, unlike the appreciation after 25, fundamentals are not the most important factor affecting the current appreciation, but the pricing mechanism of RMB exchange rate is the key. In recent two years, with the reform of the central parity mechanism, the influence of the US dollar on the RMB exchange rate is weakening, but it plays a greater role in keeping a basket of currencies relatively stable. This means that when other currencies appreciate against the US dollar, the RMB will appreciate against the US dollar with other currencies; When other currencies depreciate against the US dollar, so does the RMB. Therefore, we can see that the exchange rate of RMB against the US dollar and the trend of the US dollar index are highly correlated in the past two years, and the correlation is far greater than before.
However, there are some twists and turns in implementation. For example, although the central bank released the CFETS RMB exchange rate index in December of 215, the RMB weakened against a basket of currencies in the whole year of 16 years, mainly because the RMB was still releasing the depreciation pressure accumulated in the previous period. In the first half of 17 years, the RMB was still relatively weak against a basket of currencies, so the central bank introduced a "countercyclical factor" to hedge the problem that the RMB appreciated less against the US dollar than other currencies due to the expected inertia of the market. Since the second half of 17 years, the index of RMB against a basket of currencies has been revised and remained basically stable, and the "countercyclical factor" has also temporarily withdrawn.
Therefore, the strength of the RMB exchange rate against the US dollar in this round is more due to the weakening of the US dollar index, and the mechanism behind it is that the RMB refers more to a basket of currencies and remains basically stable. However, the problems caused by such a pricing mechanism are the same as those caused by only pegging to the US dollar. The pricing of euro, pound and yen is completely market-oriented, and the appreciation of the US dollar is a reflection of its economic fundamentals. When China's economy is in step with that of overseas countries, the appreciation of the US dollar with a basket of currencies will not bring much problem, but when the pace is not the same, the "passive" appreciation brought by the pricing mechanism will have a negative impact on the future economy.
2. What is the impact of appreciation on the economy?
when it comes to exchange rate appreciation, everyone's first reaction is that it will exert downward pressure on exports. From the historical data, the year-on-year growth rate of China's exports is indeed negatively correlated with the effective exchange rate of RMB, and the change of effective exchange rate is three months ahead of exports. The exchange rate of RMB is related to exports mainly because the change of exchange rate will directly affect commodity prices. When RMB appreciates, export enterprises either choose to keep the price of foreign currency unchanged, which will lead to the decline of commodity prices denominated in local currency; Either choose to keep the price denominated in local currency unchanged, which will increase the price denominated in foreign currency and lead to a decline in commodity demand. In either case, it may lead to a decline in the profits of export enterprises and also reduce the driving force of exports to the economy.
As mentioned earlier, the leading factors of RMB appreciation in this round are different from those before 213. In fact, China's current economic background and trade environment are also very different from those before 213. Next, we will review the impact of RMB appreciation on the economy before 213, and analyze the impact of this round of RMB appreciation.
(1) 25-13: Exports grew against the trend and the economy continued to prosper
In 25-7, the appreciation of RMB did not significantly affect the strong growth of China's exports. Although the exchange rate of RMB against the US dollar continued to appreciate after the exchange rate reform in 25, the year-on-year growth rate of China's exports remained above 2% before the subprime mortgage crisis. Although China's imports were not weak in the same period, driven by export growth, China's trade surplus continued to expand, and the trade surplus in 27 exceeded 2 billion US dollars per month.
in the same period, the contribution of net exports to GDP reached the highest level since 2. From 25 to 27, the net export promoted GDP growth by 1.4%, 1.9% and 1.5% respectively.
at that time, the export was not obviously affected by the exchange rate, on the one hand, because China's trade competitiveness was strong. Since 198, the proportion of China's labor force population has continued to increase, and the promotion of urbanization has also led to a large number of migrant workers entering the city to increase the effective labor supply. After China joined the WTO at the end of 21, the huge demographic dividend made China's labor cost low and helped China successfully join the layout of the global industrial chain. Therefore, despite the continuous appreciation of RMB since 25, the competitiveness of China's export products is still strong compared with the low labor cost.
on the other hand, at that time, the economies of the United States and Europe were improving and the external demand was strong. Since 22, the American economy has performed strongly, with the GDP growth rate exceeding 4.4% year-on-year, while the GDP growth rate in the euro zone reached 3.2% and 3% respectively in 26 and 27. The economic prosperity makes the imports of developed countries to China continue to grow. Although it has declined due to the appreciation of RMB, the year-on-year growth rate has remained above 2%.
after p>8, China's export growth rate declined, and the subprime mortgage crisis hit the global economy hard. The year-on-year growth rate of developed countries such as Europe and America once fell to -4% and -6%. Affected by the sharp decline in external demand, China's exports once fell to -26% year-on-year, and the center of export growth in 211 dropped from 2% to 1%.
But China's share of global trade is still rising. Although the export growth rate has slowed down, China's trade share is still rising, and the proportion of China's export value in global trade has continued to rise from 8.7% in 27 to 11.7% in 213. The increase in the proportion of trade shows that China's export situation is still good compared with other countries in the case of shrinking global trade.
(2) In the past 17 years, exports are not optimistic, and the economy may be under pressure
The marginal improvement of exports last year was the main driving force for GDP recovery. In 216, the net export's pull on China's GDP growth was only -.4%, while in 217, it rose to .6%, which was equivalent to a marginal increase of 1 percentage point in GDP growth. In contrast, in fact, the contribution of consumption and investment to GDP growth in 217 decreased by .2 percentage points and .6 percentage points respectively.
On the one hand, the improvement of exports is due to the synchronous recovery of overseas developed economies, on the other hand, it is also due to the depreciation of RMB against the currencies of major trading partners. Specifically, since 216, the economies of developed countries such as the United States and Europe have recovered strongly, with the PMI index of the United States and the euro zone reaching a high of 6.8 and 6.6 respectively. Since the exchange rate reform in August 11th, the RMB has depreciated against both the US dollar and the Euro, with the depreciation rate of RMB against the US dollar as high as 13%. Since mid-216, China's export growth rate has bottomed out.
But since last year, the RMB has continuously appreciated against the US dollar. Since 217, the cumulative appreciation of the RMB against the US dollar has exceeded 9%. Compared with the low point in May last year, the CFETS index has also increased by about 4%. Although the exchange rate of the US dollar against RMB rebounded slightly in February, we expect that the US dollar index will weaken in a high probability this year. Considering that the exchange rate has a certain time lag on export transmission, it is expected that export growth may be under pressure this year.
At the same time, China's export competitiveness is gradually declining. In the context of this round of global recovery, in fact, China's export growth rate has rebounded far less than that of other countries such as Southeast Asia. In 217, the average export growth rates of Vietnam, South Korea and Malaysia were 21.7%, 2.7% and 16% respectively, while the export growth rate of China was only 7.7%. The weak rebound in exports reflects that China's export products are gradually being replaced by countries with lower labor costs such as Southeast Asia. With the decline of demographic dividend, the production cost of China's export enterprises will continue to rise, and with the increase of trade barriers, the impact of RMB appreciation on exports will be greater than before 213.
from the perspective of subdivision, the appreciation of RMB will have a great impact on electronic communication equipment and traditional labor-intensive industries. According to the proportion of export output value in the main business income, we find that the export dependence of electronic communication equipment, cultural and sports entertainment products, shoes and hats, textiles and clothing and furniture industries in the manufacturing industry all exceeds 15%, and the first three even exceed 2%. If the RMB continues to maintain a high level, on the one hand, it will increase the exchange losses of these industries and reduce corporate profits; On the other hand, it will also reduce the attractiveness of products in the international market and reduce the market share of enterprises.
3. Will appreciation bring about asset price revaluation?
before answering this question, we need to make it clear that compared with the historical trend of exchange rate, the market's expectation of future exchange rate is a more important factor affecting whether asset prices will be revalued. The reason is very simple. Whether external funds flow in or whether internal funds flow out, the first consideration is not whether the exchange rate has appreciated or depreciated in the past, but whether it will continue to appreciate or depreciate in the future.
let's first examine the experience of yen appreciation. After the Plaza Accord in 1985, the exchange rate of the US dollar against the Japanese yen dropped from about 25 at first to below 13 in 1988, and the maximum appreciation rate of the Japanese yen exceeded 1%. The appreciation of the Japanese yen and the expectation of market appreciation triggered a revaluation of the domestic asset prices in Japan. From 1985 to 1988, the Japanese stock market rose all the way, the Nikkei 225 index more than doubled, and house prices also rose rapidly during this period.
However, the revaluation of asset prices by appreciation is conditional, and the expectation of appreciation needs the support of economic growth. From 1987 to 199, Japan's import growth slowed down and GDP growth slowed down, which meant that the economic situation had changed, but the yen depreciated slightly during this period, which supported the export growth rate to continue to rise and the stock index continued to hit a new high. In 199-94, the yen appreciated against the US dollar again, but at this time, Japan's economic growth rate has dropped sharply from about 5% to around %. In fact, the economy does not support the appreciation of the yen, and the market has already expected the depreciation of the yen. Capital and financial projects are basically net outflows, so the prices of assets such as the stock market and the housing market have also been hit.
Let's look at the last round of RMB appreciation in China. After the exchange rate reform in 25, the appreciation of RMB is actually small compared with the improvement of the economy itself, so the expectation of appreciation has always existed. From the comparison between NDF and spot exchange rate, it can be seen that the NDF of USD against RMB for one year in 25-28 has been lower than the spot exchange rate, which shows that the expectation of exchange rate appreciation has always existed, and the active appreciation in the economic upward cycle has not eliminated the expectation of appreciation, because the appreciation of exchange rate is still small compared with the improvement of domestic efficiency and technological progress.
Therefore, the strong expectation of appreciation will eventually lead to the continuous inflow of capital, which will promote the domestic asset prices. During this period, China not only had a current account surplus, but also a capital and financial account surplus. After 25, the growth rate of foreign exchange in China accelerated, and the massive inflow of capital boosted the rise of domestic asset prices. The stock market and housing market soared in 26-7 to some extent.
however, according to our analysis in the first part, the core difference between this round of appreciation and the last round of appreciation in the past 17 years is that the main reason for this round of RMB appreciation is the weakening of the US dollar, which is more passive appreciation. In the past 17 years, even if the exchange rate of RMB against the US dollar has greatly strengthened, the one-year NDF of the US dollar against RMB is still higher than the spot exchange rate, which actually shows the long-term depreciation expectation of the market. Therefore, since the current round of appreciation, funds have not flowed into China significantly, so it is difficult to form a revaluation of asset prices.
If the exchange rate appreciates excessively, it will, in turn, make the improvement of efficiency and technology offset by the sharp appreciation of the exchange rate, which will be detrimental to asset prices. For example, in the past year, the marginal improvement of the euro zone economy was better than that of the United States, and the euro rose by 14% against the US dollar. However, judging from the performance of the capital market, the increase of US stocks was far ahead of Europe.
in the past p>17 years, the Nasdaq index rose by more than 28%, the S&P 5 index rose by nearly 2%, while the German and French stock indexes only rose by 13% and 9%, indicating that the appreciation of the euro may also have restrained asset prices. Similarly, last year, the increase of domestic A shares was much lower than that of Hong Kong stocks, and there was little difference in their underlying assets. One of the reasons may be that the Hong Kong dollar was pegged to the US dollar and depreciated by 7.8% against the RMB in 17 years.