If the United States raises interest rates, the RMB will depreciate.
The depreciation of the RMB and inflation will not only increase the pressure on capital outflows, impact the domestic financial market, and the sharp decline of B shares, but will also seriously affect our daily lives, especially the growing overseas consumer demand.
When prices rise and inflation rises, interest rates need to be raised to prevent prices from rising too quickly. The Fed’s inflation target is 2%, which is very conducive to economic growth, so when the inflation rate starts to rise, Interest rates need to be gradually raised to meet the need to curb excessive price increases. The purposes of raising interest rates include reducing money supply, suppressing consumption, suppressing inflation, encouraging deposits, slowing down market speculation, etc. Raising interest rates can also be used as an indirect means to increase the value (exchange rate) of the domestic or regional currency against other currencies. Taking the Federal Reserve as an example, raising interest rates will boost the dollar exchange rate. As an investment product denominated in US dollars, if the US dollar appreciates, the price of gold will be directly under pressure.
Raising interest rates means raising the base interest rate. Raising interest rates means that bank deposit interest rates will increase, and loan interest rates will also be higher. The background of interest rate hikes is that the economy is growing too fast and there is a risk of overheating. In order to balance economic risks, the central bank will choose to raise interest rates, that is, raise the benchmark interest rate, to retain some funds in banks, that is, to reduce the money supply in the market. While raising interest rates balances economic risks, it will generally boost the exchange rate of the domestic currency, and accordingly, it will also affect the country's exports. Once it is excessive, it will lead to the risk of deflation.
On the surface, the reason for the depreciation of the RMB is that the U.S. interest rate hike and the appreciation of the U.S. dollar have led to a large outflow of cross-border capital in pursuit of profits, and China's foreign exchange reserves cannot bear the pressure.
The depreciation of the RMB will benefit industries such as textiles, steel, and shipping. The profits of the textile and apparel industry have been severely squeezed by the appreciation of the RMB in the past decade. If the RMB continues to depreciate, it will make domestic orders relatively cheaper, stimulate exports, and increase profits for the apparel industry, which will bring benefits.
The steel industry has overcapacity. Under the depreciation of the RMB, it will be more conducive for steel companies to go global, and then take advantage of the east wind of the Belt and Road Initiative to accelerate the speed of domestic destocking and rejuvenate the competitiveness of enterprises. . These benefits to the export industry will also drive the redevelopment of the freight business. At the same time, the depreciation of the RMB will inhibit the further expansion of sales of imported goods.