RMB'S Unilateral Appreciation Is Coming To An End. &Nbsp Will Rise To Around 6.25 At The End Of The Year.

Restart in 2010

Since May, the RMB domestic forward (DF) and overseas non deliverable forward (NDF) prices have continued to hang upside down. This signal deserves vigilance.

We believe that with the trend of narrowing of China's trade surplus, the erosion of high inflation to the appreciation space, the narrowing of arbitrage prospects and the cooling of the macro-economy, the trend of unilateral appreciation of the RMB against the US dollar is coming to an end. In the next six months to a year, the possibility of a large two-way fluctuation or even a gradual depreciation of the RMB is rising.

Through smoothing the data of China's trade surplus, we find that China's trade imbalance is improving significantly.

Since 2008, China's trade surplus has narrowed significantly. The potential monthly surplus has dropped from 25 billion US dollars to about 15 billion US dollars, and there has been a monthly trade deficit before and after the Spring Festival in 2010 and 2011.

Although China's annual surplus is still large, considering the fact that the global manufacturing industry has shifted to China on a large scale, it can be considered that China's annual trade deficit is very difficult. The current trend of narrowing of the surplus shows that China's foreign trade imbalance is undergoing a dramatic correction.

Recently, there are reports that the small businesses in southeast coastal areas are closing down. If it is true, it can be considered that under the environment of poor overseas market and domestic credit crunch, the cumulative appreciation of RMB has exceeded the extent that some SMEs can afford.

The potential role of currency gap change in future inflation and the erosion of appreciation space are also worthy of attention.

China's CPI has a highly positive correlation with the credit gap and the currency gap, and there is a lag period of 3-5 months. Since the beginning of this year, the growth rate of money and credit volume has declined considerably compared with last year. We have observed that the currency gap and credit gap have been shrinking since November 2010, and the credit gap has shifted from March 2011 to a negative gap. The currency gap has shifted to a negative gap in April, and the downward trend continues.

According to the relationship between the two and CPI, we expect that CPI will reach the top in two months.

However, in the future, CPI will probably continue to operate at a higher level and even rise again.

If the central bank does not adjust the target 16% of the new credit this year, according to the amount of credit in the first five months to estimate the amount of credit in the next 7 months (using the simple moving average method), and then calculate the credit gap, we find that the credit gap in the second half of 2011 has a trend of re enlargement. Based on the lagging characteristics, the credit gap may push the CPI back to rise from the end of 2011 to the beginning of 2012.

At the same time, South China has experienced extreme abnormal weather with droughts and floods this year. The risk of grain and agricultural products reduction is very high. This will drive food prices to rise again and push up the new price increase factor in the second half of CPI.

Therefore, as a whole, we expect that the CPI will be limited in the next six months to a year and will remain at a high level.

Inflation will play an appreciating role in the real effective exchange rate. The high inflation in China and the prospect of high inflation in the future will significantly reduce the space for RMB appreciation.

Even Geithner, the US Treasury Secretary, did not deny that, in his speech on the road to Sino US economic relations, which was published in January this year, he said that China's inflation rate was significantly higher than that of the United States, which led to the appreciation rate of the real effective exchange rate of RMB was much higher than the nominal exchange rate appreciation, and acknowledged that the severity of the RMB exchange rate dispute was reduced due to China's high inflation rate.

While inflation is high in China, the Chinese economy is likely to continue to cool down and present a stagflation pattern.

Since the beginning of the year, many economic indicators in China have pointed to the economic slowdown. If there is no accident driving factor, this slowdown trend will not change. On the macro level, the basic driving force for RMB appreciation is weakening.

Based on the judgement of macroeconomic cooling down, the space for China's central bank to continue to raise interest rates in the future is actually relatively limited, and RMB interest rates are close to the top.

The US economy is expected to maintain a recovery trend, and the performance in the second half is likely to be better than the first half. Even though the US dollar interest rate is very low, it will face a gradual upward pressure in the future, which will squeeze into the arbitrage space of China's hot money.

The estimated value of monthly hot money calculated by the residual method has a high positive correlation with the arbitrage space. Therefore, the attractiveness of the US China interest rate difference to the hot money will gradually decrease in the future, thereby reducing the pressure of the hot money inflow on the appreciation of the renminbi.

On the whole, we believe that the appreciation trend of RMB will continue in the short term, and it will probably increase to about 6.25 by the end of the year. However, for half a year or more, the unilateral appreciation of RMB is being compressed, and the volatility of the market will be significantly enlarged.