China Safe Explains Why RMB Fluctuates

In the semi annual report on balance of payments issued by the safe, the asset market model is used to explain the recent fluctuations in the renminbi. This is a fundamental change in the thinking pattern, reflecting the fact that the renminbi is becoming more market-oriented and more and more close to other financial assets.

Safe said that the two-way fluctuation of RMB exchange rate will be a new normal.

The asset market model regards money as a financial asset and uses the theory of financial market to explain the fluctuation of exchange rate.

In contrast, purchasing power parity theory and other economic theories explain the exchange rate changes through GDP growth, inflation, productivity and current account balances.

In 2013, the volume of foreign exchange market pactions in the world amounted to 20 million billion US dollars, far exceeding the international trade turnover of US $18 trillion this year. In this case, it is easier for investors to resonate with asset market models to track short-term exchange rate fluctuations.

Safe uses asset models to explain the two-way movement of Renminbi over the past year.

In 2013, the rise of the RMB exchange rate was driven by Chinese enterprises borrowing dollars and buying Renminbi.

In the first half of 2014, the RMB exchange rate declined, driven by factors such as China's economic slowdown, weakening trade growth, increased credit risk, and the gradual withdrawal of the Federal Reserve's quantitative easing policy.

At the same time, Chinese companies were encouraged to hold their foreign exchange positions, while overseas investors also reduced the amount of investment in Renminbi assets.

This asset market model is of great significance for the future of the renminbi.

Looking ahead, rising domestic financial risks, narrowing of the US dollar interest rate, and volatile international capital flows may continue to cause pressure on the renminbi and cause the RMB exchange rate volatility to intensify.

Using the asset market model instead of economic theory to explain the RMB exchange rate movements, this change also shows that the RMB is closer to becoming a market currency.

The Chinese government has spent 10 years to reform the RMB exchange rate mechanism and let the RMB exchange rate be closer to the fair value. Since the middle of 2005, the renminbi has appreciated by 40% against a basket of currencies.

Marketization of the renminbi means predictability is weakened, while the unilateral bet on the appreciation of the renminbi will face higher risks.

In any case, this will bring vitality to the RMB market, including domestic and offshore markets, and bring new investment opportunities for global investors.

China's export improvement is expected to help the economy.

More encouraging is the acceleration of import growth, which shows that the momentum of economic growth in September may not be weakened.

This has reduced fears of a downturn in the economy.

This relieves the pressure of further easing of Chinese officials' policies.

In September, exports increased 15.3% over the same period last year, an increase of 9.4% over August, and higher than 12% of analysts' expected median.

Imports grew by 7%, down from 2.4% in August, far exceeding the expected decline of 2%.

The trade surplus was US $31 billion, down from last month's US $49 billion 800 million.

The growth rate was the fastest since February 2013, and import growth was the fastest since February 2014, indicating an improvement in external and domestic demand in September.

Despite the disappointing growth of European and emerging market economies, the strengthening of the US dollar has helped drive demand for manufactured goods in China.

The easing of policy over the past few months seems to help the domestic economy from further slowdown.

The latest move of the Chinese government is to ease lending restrictions on two suite buyers.

At the same time, in addition to the first tier cities in Beijing, Shanghai, Guangzhou and Shenzhen, most Chinese cities have cancelled the purchase restrictions for non residents.

Although these policies are unable to solve the structural oversupply problem in the real estate sector, they are expected to help boost demand in the real estate market.

In the interbank market, the Central Bank of China has maintained interbank interest rate stability.

In September, the central bank also injected 500 billion yuan into five major banks, helping to increase the money supply and reduce interbank interest rates.

The 7 day repo rate is currently 3.25%, less than 4.26% at the end of 8.

Re emerged in September

This has increased the pressure of RMB appreciation.

At the same time, fears of a downturn in the economic outlook have hit expectations for further appreciation.

This will cause the RMB exchange rate volatility to intensify.

Looking ahead, there are signs that the external environment will continue to improve.

The export orders classification index of China's two Purchasing Managers Index (PMI) rose in September.

The new export orders index of China's National Bureau of statistics rose from 50 in August to 50.2, while HSBC's new export orders index rose from 51.9 to 54.5.