Pan Zhengyan: The RMB Exchange Rate Does Not Yet Have The Overall Market Game Conditions.

Since the beginning of this year, the RMB exchange rate has depreciated in an abnormal way, which has caused various speculation in the market. In particular, the central bank [micro-blog] decided to expand the floating rate of the renminbi against the US dollar, which would have much effect on the current expectation of the depreciation of the RMB exchange rate and the increase in cross border capital reverse flows. The author believes that we should be cautious in dealing with the market game of RMB exchange rate. The momentum of RMB appreciation continues to decline and the trend of devaluation is expected to occur. Excessive cross-border capital flows will force the RMB exchange rate to fluctuate significantly, leading to instability in the financial market. At the same time, we must pay attention to the accumulation of risks when the RMB exchange rate does not yet have the full market game.

As we all know, although the exchange rate depends on the supply and demand of the market, more importantly, it reflects the intrinsic value of the local currency. The appreciation of the renminbi over the past years has played a decisive role in the internal value of the renminbi, that is, China's sustained economic growth rate, export growth rate and trade surplus. However, since 2012, China's economy has gradually entered the stage of adjustment and bottoming. In 2012 and 2013, China's GDP growth still reached the established target, but the transition from "8 guarantees" to "7 guarantees" objectively reflected the fact that it is difficult to maintain high growth. In particular, market sentiment has been reflected in specific economic indicators. Due to the small and medium-sized enterprises' expectations of China's economy are not ideal, HSBC PMI has been lingering from early 2013 to less than 50, while the PMI of the National Bureau of statistics has been hovering over 50, but it has been difficult to improve. A series of indicators such as insufficient enterprise orders, small business situation and low employee index are not optimistic. Moreover, imports and exports that have been "fueling" the appreciation of the renminbi have been weakening last year, and this year is even more difficult. From the perspective of internal value, the upward trend of RMB against the US dollar was difficult to sustain at the end of last year. Moreover, excessive appreciation with a lack of internal basis is likely to be reversed in a certain period of time, and the risk should not be underestimated.

For a long time, the relative advantage of RMB appreciation is derived from dollar Depreciation. A few years ago, the US dollar index dropped from nearly 90 to about 80, and the renminbi will appreciate somewhat against the US dollar. In the 8 years since 2005, the global economy has experienced two rises and three falls, 5 bands. Especially at the beginning of the financial crisis in 2008, the US dollar index plunged to 70.7, and the yuan rose against the US dollar. However, as the global demand for hedge increased and the US dollar reversed, the US dollar index remained basically volatile. Only in the ups and downs of the US dollar, the RMB maintained its appreciation for 8 years. The yuan appreciated 5.11% against the US dollar in 2011, 1.03% in 2012 and 3% in 2013. As the Federal Reserve started to reduce the size of asset purchase plan in the late last year, the dollar restarted its appreciation trend. At the same time, from the weakness of the US economy in China's economy, the relative advantage of the appreciation of the RMB exchange rate is gradually changing, and the Chinese economy is wandering at the bottom. Although the US economy is still not "improving", it has been in an obvious recovery and rising trend. With the strengthening of the US economy and the US dollar, the trend of RMB exchange rate depreciation will be faced with the same huge exchange rate risk and market risk.

There is no doubt that in RMB exchange rate After the expansion of the fluctuation range to 2%, cross-border capital flows will play a more intense role. The exchange rate market game may have a greater impact on the domestic financial market. In fact, in 2012, when the fluctuation rate of RMB exchange rate expanded to 1%, cross-border capital flows were significantly strengthened. The main purpose of international capital flows, especially short-term cross-border capital flows, is "arbitrage". Although short-term cross-border capital flow arbitrage is conducive to the "balance" of market capital, once there are too big institutional defects and arbitrage space, short-term cross-border capital flows will bring about not only "balance" but "severe volatility". Since 2013, cross-border capital flows have entered an indisputable scale. From the positive and negative changes in the monthly increments of foreign exchange held by financial institutions, the changes in interest rates in domestic financial markets, and even the price changes in the Chinese capital market, which are not very sensitive, all reflect the role and power of cross-border capital. Now, it is widely expected that the US interest rate increase will be greatly strengthened in 2015 with the gradual normalization of monetary policy in the US. Comparatively speaking, from the perspective of China's economy and inflation and its expectation, I am afraid that it is difficult to raise interest rates until at least 2016. In this way, the "reverse movement" of cross-border capital will be a big probability event next year. However, even large probability events do not mean that cross-border capital is a movement in a direction. Just like in the past few years, under the background of RMB appreciation, cross border capital is not an inflow of one-way movement, but also an entry and exit. This implied financial risk will be far greater than the so-called exchange rate appreciation or depreciation risk. Especially from time and space, it is estimated that large scale cross-border capital movements will become more prominent before and after the second half of 2014, which is likely to cause severe shocks to the foreign exchange market and financial market, and its destructiveness should not be underestimated.

On the other hand, RMB The basis for the exchange rate to enter the comprehensive market is not enough. For example, the domestic price system, especially the interest rate system, is not enough to deal with the full market game of exchange rate. RMB interest rate marketization reform and exchange rate reform should be mutually conditional and basic. In particular, cross-border capital flows are very sensitive to changes in deposit interest rates. At present, there is a huge gap between domestic and foreign interest rates, and the overall market game of exchange rate may result in large-scale cross-border capital flows. Many people believe that this situation can be changed after the RMB interest rate is marketization. The author believes that whether the marketization of interest rate can change the current huge gap between domestic and foreign interest rates is not certain. On the contrary, from the fact that the so-called marketization of loan interest rate has been implemented now, the interest rate marketization is not narrowing but enlarging the gap between domestic and foreign interest rates. Obviously, because of the huge interest rate space at home and abroad, excessive promotion of exchange rate marketization may aggravate the fluctuation of domestic interest rates, and is not conducive to the stability of financial markets.

In addition, we must not overestimate the "material base - foreign exchange reserve" of the renminbi exchange rate that has entered the overall market game. China does have the largest foreign exchange reserves in the world with a scale of nearly US $4 trillion, but some basic resources of China's economy and people's lives rely more and more on imports. And as is well known, the more resources China imports, the faster the world's resource prices will rise. In the face of the world's second largest economy and 1/5 of the world's population, the role of the 4 trillion dollar family base is relatively limited. Once the market fluctuation (outflow) and domestic demand increase at the same time, are these reserves enough?

The reform of the RMB exchange rate system must be a general direction. However, because of the complexity of the exchange rate issue, we need to comprehensively review the formation mechanism of the RMB exchange rate and the relationship between market stability and China's financial security from the perspective of monetary finance, especially from the perspective of maintaining financial market stability and controlling financial risks. From a market perspective, as before, we all do not want to see the appreciation of the renminbi as expected, and we can not take lightly the expectation that the RMB exchange rate will depreciate.