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RMB Appreciation Is Coming Soon.

2011/8/22 10:45:00 31

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Compared with the US dollar, the central bank launched the exchange rate reform in July 21, 2005.

appreciation

29.4%, even if the central bank restarted exchange reform in June 19, 2010, the yuan has appreciated by 6.8% against the US dollar.

In addition to a few currencies such as rial, Swiss franc, yen and Thai baht in Brazil, the renminbi has been the largest currency appreciation for all currencies in the period.

For now, the appreciation of the renminbi seems to continue.

The central bank issued the first report on the implementation of China's monetary policy in August 12th, which is the first time that the exchange rate is used as a policy tool. This indicates that the central bank may further use the exchange rate tool.

After all, since 2010, the central bank has raised the reserve requirement rate 12 times continuously. Due to the continuous increase in the reserve ratio, the domestic credit contraction is unlikely to continue. Further raising the reserve ratio is not enough to hedge the liquidity of foreign exchange channels.

At the same time, the total amount of social financing is strictly inhibited and other factors.

Under such circumstances, the central bank needs to rely more on accelerating the appreciation of the renminbi to avoid further inflow of foreign exchange funds in order to ease the central bank's hedging pressure.

For will

exchange rate

As a policy tool, China's appreciation rate is no longer fully linked to the supply and demand relationship in the foreign exchange market.

When the renminbi exceeds supply or there is a risk of capital flight, the central bank may not take the initiative to allow the renminbi to depreciate in order to avoid devaluation and to further strengthen capital flight.

For example, during the financial crisis of 1998, although other emerging market economies were competing for depreciation, the central bank took the initiative to narrow the fluctuation zone of the renminbi and maintain the stability of the RMB against the US dollar at around 8.27.

For example, after the worsening of the global financial crisis in September 2008, although the central bank stopped the pace of RMB appreciation, it did not allow the yuan to depreciate, but kept the RMB against the US dollar stable at 6.83.

When the RMB supply is less than the demand or there is a large influx of hot money, the central bank will not easily let the RMB appreciate significantly, but in accordance with the principle of initiative, gradualness and controllability, the renminbi will slowly advance to the US dollar's annual appreciation of about 7%.

For example, from July 21, 2005 to July 21, 2008, it appreciated by 21% in three years, averaging an annual appreciation of 7%.

In the year to June 19, 2010, it has appreciated by 6.8% over the past year.

From this point of view, once the central bank is determined to continue to use the exchange rate instrument, no matter how large the imbalance between supply and demand in the foreign exchange market, the RMB will maintain an appreciation rate of about 7% a year.

However, the current stage of RMB

appreciation

That is to say, if the RMB exchange rate has a reasonable equilibrium level, this reasonable equilibrium level has basically reached.

In the next year or so, the renminbi will expect a maximum appreciation of 7% against the US dollar. The exchange rate of RMB against the US dollar is likely to achieve a managed float near 6, and RMB exchange rate flexibility will also increase significantly.

In fact, we can see this possibility from the following aspects.

First of all, despite the fact that the yuan is keeping up with the US dollar, the asset price bubble effect of RMB appreciation is no longer apparent.

We know that asset prices are the discount of future earnings expectations, and the discount rate is generally the domestic medium and long term interest rates.

According to the interest rate parity, the domestic medium and long term interest rate is equal to the foreign market interest rate minus the expected appreciation rate of RMB, plus the risk premium factor.

Therefore, when a country's currency is expected to rise, the discount rate of asset prices will be depressed and asset price bubbles will emerge.

After the Plaza Accord in 1985, the substantial appreciation of the yen also accompanied by the continuous expansion of asset price bubbles in Japan.

After China launched the reform in July 2005, along with the gradual appreciation of the RMB against the US dollar, although the government is constantly raising interest rates and raising standards, the domestic asset price bubble is still expanding.

However, since 2011, despite the appreciation of the renminbi, asset price bubble effect has not appeared, and the stock market has continued to slump.

To a certain extent, this reflects that investors have limited space for further appreciation of the renminbi, and even have basically reached a reasonable equilibrium level.

Under such circumstances, the expected appreciation rate of the renminbi will decrease or even reverse, thus raising the level of domestic discount rate, so that it can not only stimulate the asset price bubble but also pierce asset price bubbles.

Second, despite trade.

surplus

The long-term capital inflows and FDI are expanding, but the expected appreciation rate of RMB is weakening, the scale of short-term capital inflows is shrinking, and hot money even reappears in July.

Judging from the implied appreciation expectation of the NDF market, the current RMB appreciation expectation is obviously weakened. The expected rate of NDF appreciation has dropped from 3% in April to about 1% in August.

Correspondingly, the scale of short-term capital inflows is also decreasing significantly.

The scale of the influx of hot money fell from an average of more than 300 billion yuan per month in the first quarter of this year to an average of about 160 billion yuan in the two quarter of this year, especially in July, when hot money poured into the influx again, and the net outflow of hot money in July was 42 billion 800 million yuan.

Hot money gush has been concentrated in the history of the global financial crisis in 2008. During the European debt crisis in April 2010, the net outflow of hot money has also been seen briefly.

At present, there is a sign of the net outflow of hot money again, and this happened in July when the trade surplus reached a new high. This means to some extent that investors' expectation of further appreciation of RMB is weakening.

And if the hot money continues to flow out, the appreciation of the renminbi is expected to reverse.

In fact, during the period from September to June 2009, the hot money continued to flow out and there was a large and sustained devaluation of RMB. At that time, the RMB depreciation rate implied in the one-year NDF market was even higher than 6%. In 2008,

The hot money is mainly to take advantage of spreads, remittance and return on investment.

However, at present, China's interest rate has gone up to a higher historical position, the financial cost of investment is high, the RMB is also appreciating to a certain extent, the inflation is also rising to the high level, and the risk premium is high. Even this risk premium has begun to cover the profit caused by the difference of difference of profit, sinks and return on investment, so the hot money is likely to be normalized again, and the rising of hot money will, to a great extent, indicate that the appreciation of RMB has been basically in place.

Finally, although the US Federal Reserve's ultra low interest rate policy makes the US dollar continue to maintain a weak position in the short term, it is difficult for the US dollar to continue to explore. With the economic recovery brought by the low interest rate of the Federal Reserve, the US dollar will gradually get rid of the weak dollar status in the next stage, which will weaken or even reverse the appreciation of the renminbi.

The reform of the RMB exchange rate formation mechanism depends largely on the US dollar trend.

If the US dollar continues to strengthen and the pressure of RMB appreciation is reduced, the central bank will generally start the pace of foreign exchange reform. If the US dollar continues to be weak and the pressure of RMB appreciation will increase, the central bank will start the reform at this time, and the appreciation of RMB will be difficult to control.

At present, although the Federal Reserve announces that the ultra-low interest rate policy will last until at least the middle of 2013, the exchange rate as the relative price of the currency will not lead to the collapse of the US dollar.

No matter from the economic indicators such as the deficit rate, unemployment rate and inflation rate, the US economy is not worse than that of the euro area and Japan. The promise of low interest rate policy of the United States may lead to consumption and investment in the US, stimulate the rebound of the US economy, and gradually drive the US dollar to strengthen in the medium term.

In addition, the appreciation rate of RMB has been very large. The Chinese government is also actively encouraging foreign investment, reducing capital controls that are not conducive to foreign investment, and gradually improving the management system of foreign exchange market. The imbalance between supply and demand in foreign exchange market will also be changed.

Under such circumstances, the RMB exchange rate with the US dollar is likely to gradually achieve a managed float instead of a unilateral appreciation.

Moreover, as prices peaked in the three quarter of this year, the pressure on the central bank to curb imported inflation through the appreciation of the renminbi will be greatly reduced.

The RMB exchange rate against the US dollar is likely to achieve a managed float near 6, and RMB exchange rate flexibility will also increase significantly.

Once the normalization of hot money comes out, to a large extent, the appreciation of the renminbi has basically been put in place.

As prices peaked in the three quarter of this year, the pressure on the central bank to curb imported inflation through the appreciation of the renminbi will be greatly reduced.