What is the impact of the RMB exchange rate "beyond 7"
Against the backdrop of the divergence of the Sino-US currency cycles in which the U.S. dollar is raising interest rates and the RMB is cutting interest rates, the RMB exchange rate is experiencing unprecedented fluctuations in the past two years. So today the editor is here to sort out the impact of the RMB exchange rate breaking 7, let’s take a look!
The exchange rate fluctuates: traders’ preferences change
On August 15, After the central bank lowered the MLF (medium-term lending facility) interest rate, the RMB exchange rate depreciated rapidly against the US dollar. On that day, the offshore RMB once fell nearly 700 points, approaching the 6.82 mark, marking the largest drop since March 2020. On August 22, after the LPR (Loan Prime Rate) was lowered, the RMB further depreciated.
This momentum does not end. On August 29, the exchange rates of onshore RMB and offshore RMB against the U.S. dollar respectively fell below 6.92, the lowest level in the past two years. As of September 1, the onshore RMB and offshore RMB exchange rates against the US dollar were at 6.9055 and 6.9139 respectively, depreciating by approximately 8.5% and 8.2% from mid-April.
Behind the continued depreciation of the RMB is the continued strengthening of the US dollar index. On September 1, the U.S. dollar index rose to its highest point since mid-July this year to 108.9900.
The recent depreciation of the RMB is largely a passive depreciation. From the perspective of international factors, the U.S. dollar continues to strengthen, which is closely related to the Federal Reserve entering an interest rate hike cycle, driving funds back to the U.S. market.
Since March, the Federal Reserve has raised interest rates by a total of 225 basis points. On July 27, the Federal Reserve raised interest rates for the fourth consecutive meeting and raised interest rates for the second consecutive time by 75 basis points. Data from the U.S. Treasury Department show that in the first half of this year, U.S. net capital inflows reached $812 billion.
Inflation and employment are the two most important goals of the Federal Reserve's monetary policy. According to Yuan Tao, a senior foreign exchange analyst at Dongzheng Futures, the reason why Powell does not want to firmly adopt a hawkish monetary policy is because compared to raising interest rates, allowing inflation to repeat will have more profound consequences for the U.S. economy and financial markets. harm. The current inflation in the United States is at a 40-year high, and core inflation remains high, while the unemployment rate is at a half-century low. The unemployment rate data provides confidence for Powell to continue to raise interest rates.
Data from the U.S. Department of Labor show that from May to July, the U.S. Consumer Price Index (CPI) rose by 8.6%, 9.1% and 8.5% year-on-year respectively after seasonally adjustment. From a breakdown, in view of the increase in rent and service prices, excluding food and energy prices, the core CPI increased by 5.9% year-on-year in July.
Falling interest rates: Debt market leverage rises
During the period of declining exchange rates, the interest rate on RMB funds also dropped twice.
According to CITIC Securities’ calculations, since April, against the backdrop of the central bank’s 25 basis point cut in reserve requirements, guidance on deposit interest rate cuts, and various re-loans, the RMB funding interest rate has begun its first significant downward trend in the year.
From March 31 to April 29, the central overnight and 7-day funding rates fell by about 40 basis points from 1.78% and 2.03% to around 1.35% and 1.67%. From the beginning of July to the beginning of August, the peak of special bond issuance in June has passed, and the market funding interest rate has dropped for the second time.
Data show that from July 4 to August 4, the central overnight and 7-day funding rates dropped from 1.35% and 1.70% to 1.07% and 1.41%, a decrease of nearly 30 basis points.
China Money Network data shows that in early August, the weighted average interest rate of DR007 was as low as about 1.29%, which was significantly lower than the OMO interest rate of 2.1%, and the interest rate difference between the two reached 81 basis points.
Financial statistics in July show that social financing increased by 756.1 billion yuan that month, which was lower than market expectations of 1.4 trillion yuan and a year-on-year decrease of 319.1 billion yuan. The single-month increase in social financing was the same as in July 2016. New low after month. In July, RMB loans increased by 679 billion yuan, lower than market expectations of 1.1 trillion yuan, and a year-on-year decrease of 401 billion yuan, becoming the main drag on social financing that month.
Funding interest rates are running at low levels, igniting the enthusiasm for leveraging in the bond market. 5 trillion yuan, 6 trillion yuan, 7 trillion yuan... Since April, the volume of inter-bank pledged repurchase transactions has continued to reach new highs during the year.
“With the low capital interest rate, the debt market leverage continues to rise, and the phenomenon of funds diverting from real funds to virtual funds needs attention.” The chief economist of CITIC Securities clearly reminded that while the accumulation of liquidity in the financial system occupies real credit resources, , high leverage also poses potential risks to the stability of the financial system itself.
The market capital interest rate also started a volatile upward trend. Taking the pledged repurchase (DR) interest rate of depository institutions as an example, the overnight (DR001) and 7-day (DR007) interest rates fluctuated slightly around the center of 1.04% and 1.30% before the interest rate cut. After the interest rate reduction operation, the funding interest rate rebounded. As of On August 31, it had rebounded to 1.45% and 1.75%.
Double rates are under pressure: real demand needs to be improved
As the world's major economies raise interest rates, the double decline in the RMB exchange rate and interest rates also reflects the impact of China's independent monetary policy It is both showing and helpless.
Recent PMI (Purchasing Managers Index) data show that the current domestic economic fundamentals still need to be improved.
Data from the National Bureau of Statistics showed that the manufacturing PMI in August was 49.4%, lower than the boom-bust line (50%), an increase of 0.4 percentage points from the previous month, and the manufacturing boom level has rebounded. Zhou Maohua, a macro researcher at the Financial Markets Department of China Everbright Bank, analyzed that the manufacturing PMI index improved marginally in August, and the PMI index and most sub-indicators were below the boom-and-bust line, reflecting that the overall recovery momentum at both ends of domestic supply and demand is still weak.
Previously, a number of economic data in July fell more than expected. The manufacturing PMI in July was 49.0%, down 1.2 percentage points from the previous month, to below the boom-bust line. In terms of production, the added value of industrial enterprises above designated size in July grew by 3.8% year-on-year, down 0.1 percentage points from the previous month; in terms of consumption, the total retail sales of consumer goods in July grew by 2.7% year-on-year, down 0.4 percentage points from the previous month; in terms of investment, in July Monthly fixed asset investment increased by 3.6% year-on-year, down 2.2 percentage points from the previous month; in terms of prices, after excluding food and energy prices, the core CPI in July was only 0.8%, with the growth rate falling by 0.2 percentage points from the previous month.
In July, RMB loans increased by 679 billion yuan, lower than market expectations of 1.1 trillion yuan, and a year-on-year decrease of 401 billion yuan. According to CICC estimates, medium- and long-term loans to residents, medium-to-long-term corporate loans, and short-term corporate loans decreased by 248.8 billion yuan, 147.8 billion yuan, and 96.9 billion yuan respectively year-on-year in July, which was the main drag on the decrease in RMB loans that month. This reflects the declining demand for home purchases by residents and the weak financing demand of enterprises under the risk environment of the real estate market.
At the same time, money supply maintained rapid growth in July, with M2 (broad money) growing at a year-on-year rate of 12%, a new high since May 2016. CICC stated that if the gap between social financing and M2 is understood as the gap between financing demand and money supply, the gap reached 1.3 percentage points in July, which is at a high level in history (2006-2022).
Economic fundamentals are crucial to stabilizing capital flows and the RMB exchange rate. China's capital flows are highly correlated with PMI, and the correlation coefficient is higher than interest rate spreads and the US dollar index. Regardless of interest rate reduction or fiscal expansion, if it can significantly improve China's economic prosperity, it will play a supporting role in the RMB exchange rate.
Credit expansion: Banks make counter-cyclical efforts
Take consumer loans as an example. In the first half of the year, the consumer credit interest rates provided by commercial banks such as state-owned banks, joint-stock banks and city commercial banks for high-quality customers It has entered the prefix "3". A consumer installment product launched by a major state-owned bank has a limited-time preferential annualized interest rate as low as 3.53%, which is already lower than the one-year LPR interest rate level.
Major state-owned banks, whose new loans in 2021 accounted for nearly 45% of the country's total, will still generally increase credit in the first half of 2022. According to data from the six major banks' interim reports, in the first half of the year, the four major banks, ICBC, Agricultural Bank of China, Bank of China and China Construction Bank, all had new RMB loans exceeding one trillion yuan. The scale of new RMB loans of Postal Savings Bank and Bank of Communications each exceeded 500 billion yuan. Among them, new domestic RMB loans from ICBC and Bank of China, and new loans from Agricultural Bank of China and Postal Savings Bank of China all hit record highs.
In terms of credit investment, key areas of the real economy such as infrastructure industries, manufacturing, green development, inclusive finance, and rural revitalization have become the main investment directions. In the credit extension plan for the second half of the year, increasing credit extension is still the first priority for major banks.
Central Bank Regulation: Enhance Exchange Rate Flexibility
The development of economic fundamentals is crucial, and China’s monetary policy is also facing new choices.
From an international background, major central banks around the world such as Europe and the United States have successively raised interest rates, and the interest rate gap between China and the United States has gradually widened, which is squeezing China's monetary policy space. If a liberal monetary and credit environment is maintained, although it will be beneficial to exports to a certain extent, it will also increase further downward pressure on the RMB exchange rate. In the context of a high US dollar, this will raise the cost of importing goods denominated in US dollars, or bring about imported inflation. At the same time, this will also increase the debt servicing costs of foreign debt. If the environment of loose money and credit is changed, it will put pressure on industries such as real estate and infrastructure.
So far, the People’s Bank of China has not made any obvious move to intervene in the market. However, some institutions have found that the central bank is indirectly affecting the exchange rate market by strengthening control over the central parity rate of the RMB.
Data from the China Foreign Exchange Trading Center shows that from August 29th to 31st, the central parity rate of the RMB exchange rate was reported at 6.8698, 6.8802, and 6.8906. According to calculations by CICC, in the past four trading days, the central parity rate of the RMB was approximately 120, 56, 96, and 249 points stronger than market forecasts. According to market estimates, as of the 31st, the central bank had set the central parity rate of the RMB at a level stronger than market expectations within six trading days.
The central parity rate of RMB refers to the central parity rate of RMB against the U.S. dollar and other major foreign exchange currencies calculated and published by the trading center on a daily basis under the authorization of the People's Bank of China. The daily RMB exchange rate can only float within 2% of the RMB central parity rate.
In addition, regulatory authorities have also strengthened the management of foreign debt. On August 26, a draft for comments was released on the website of the National Development and Reform Commission. If borrowers such as financial companies issue overseas debt with a maturity of more than one year, they must register, report and obtain approval from the National Development and Reform Commission. Previously, borrowers only had to register their offshore bond issuance plans with the National Development and Reform Commission.
The Foreign Exchange Administration stated that China’s foreign exchange market has always shown strong resilience.
Trade in goods showed a relatively high surplus, actual utilization of foreign capital maintained growth, and continued to play a fundamental role in stabilizing cross-border capital flows and the foreign exchange market. At the same time, since August, overseas investors have generally purchased Chinese securities on a net basis. Choice data shows that following the net outflow from the A-share market in July, northbound funds had a small net inflow of 12.713 billion yuan into A-shares in August, reflecting the long-term investment value of RMB assets. .
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