Comment: RMB Is Facing Greater Pressure Of Depreciation.

< p > a href= "http://www.91se91.com/news/index_cj.asp" > short-term devaluation < /a >: short-term exchange rate changes are mainly affected by monetary policy and domestic and foreign interest rates.

The recent devaluation of the renminbi is mainly influenced by policy, which indicates that the central bank may expand the trading range of RMB.

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Until recently, short term interest rates in China continued to rise, indicating that the rapid growth of investment and the decline in marginal investment efficiency brought about a strong demand for financing P.

This is in sharp contrast to loose monetary policies and low interest rates in the US, a href=, http://www.91se91.com/news/index_cj.asp, euro /a and Japan.

As a result, spreads on domestic and foreign markets continue to expand and remain high.

Domestic and foreign spreads and significant appreciation of the renminbi in recent years have attracted capital inflows, some of which flow in the form of false exports.

Speculative capital inflows accelerated the increase in foreign exchange reserves, which further increased the pressure on the appreciation of the renminbi. The central bank had to hedge domestic liquidity by means of repurchase and short-term liquidity adjustment, which pushed up domestic interest rates.

This vicious circle has exerted great pressure on the central bank, making its foreign assets return in the form of US Treasury bonds basically zero, while weakening China's export competitiveness and pushing up the risk of the financial system.

In recent weeks, the central bank has deliberately weakened the intermediate price of the renminbi to reduce speculative capital inflows.

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The intervention of < p > < a href= "http://www.91se91.com/news/index_cj.asp > > money market < /a > also implies that the RMB trading range will be expanded. This will be a major measure to achieve RMB" marketization "in the financial reform measures proposed in the Third Plenary Session of last November.

Taking history as an example, the yuan depreciated by 0.5% in the weeks of spring 2012. Then in April 16th, the central bank raised the RMB trading range from + 0.5% to + 1%.

In the next three months, the yuan continued to depreciate by 1.4%, until the trend of appreciation was restored in July.

We believe that the daily trading range of RMB will be further expanded to + 2%, and the RMB may continue to depreciate in the coming months.

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< p > medium-term stability: in the medium term, exchange rate is mainly affected by the balance of payments of nations, especially the current account.

China's current account balance reached 10% of GDP in 2006-2007 years, and then maintained a downward trend, which has dropped to 1.65% of GDP in 2013.

In the future, China will maintain a small surplus in the current account in 2014-2015 years, mainly because the recovery of China's main trading partners will promote exports, and the slowdown in investment will slow down imports. This indicates that the RMB will remain stable in the medium term, or even slightly appreciate.

In addition, if China wants to internationalize its currency, it needs to ensure that the RMB exchange rate is stable or appreciating.

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< p > long term devaluation pressure: in the long run, the RMB is facing greater devaluation pressure, especially when RMB internationalization is allowed to make excessive appreciation of RMB in the medium term.

The long term monetary value of a country depends on the growth of labor productivity and purchasing power parity.

If a country's unit labor cost (wages divided by productivity) grows faster than other countries, and inflation exceeds other countries, resulting in a decline in domestic purchasing power, the country's currency will eventually depreciate.

The instability of the financial system, high debt and asset bubbles will increase the risk of final currency depreciation.

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< p > in the past few years, as China's wage rise and RMB appreciation, China's unit labor costs have been rising steadily.

Unit labor costs in Thailand, Philippines, India and Indonesia are now lower than those in China.

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< p > because of the expansion of money and credit, China's real inflation rate exceeds many countries.

The cost of living, including housing, automobiles, clothing and even food (based on quality considerations) has risen significantly, even more than many high-income countries.

According to the economist, the "Big Mac price index" based on income adjustment shows that the value of the renminbi has been overestimated to a certain extent.

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< p > in addition, the risk of China's financial system and asset price bubble also increase the risk of RMB devaluation in the future.

China's rapid growth in debt has reached 229% of GDP, making the financial system less capable of slowing economic activity.

Recently, the breach of trust products and corporate bonds verified this point.

However, China is faced with structural cracks such as economic imbalance, aging population and environmental pollution, and economic slowdown is hard to avoid.

Housing prices have risen to a dangerous high point. The monthly income of big cities is much higher than that of the old. Aging population and urbanization barriers (such as household registration restrictions) all show that such high housing prices will not be supported in the future.

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