The Renminbi Will Not Take The Initiative In Competitive Devaluation.

After the central bank announced its interest rate cut, the RMB exchange rate against the US dollar depreciated significantly in the first trading day, but this did not indicate a reversal of the trend of exchange rate, no matter from the short-term. Interest margin Looking at the change, from the long-term balance of payments and purchasing power parity, the renminbi does not currently have the trend of devaluation.

In November 27th, the central parity of RMB against the US dollar was 6.1320, an increase of 34 basis points from 6.1354 of the previous trading day. After a brief devaluation on Monday, the RMB exchange rate has appreciated for three consecutive trading days, hitting a eight month high.

On Monday, the central bank cut interest rates. RMB versus US dollar The intermediate price and spot exchange rate all depreciated, but this is the result of the market instinct reaction. As the RMB exchange rate elasticity increases, two-way volatility is frequent. exchange rate Short term fluctuations should be regarded as "new normal".

Since the beginning of this year, the nominal exchange rate of RMB has appreciated little, but the effective exchange rate has continued to appreciate. According to the BIS, the real effective exchange rate (REER) of the renminbi increased by 1.50% in October to 121.57, the nominal effective exchange rate (EER) reached 117.73 in October, and the two achieved the highest level since 1994.

Since the beginning of June, the RMB effective exchange rate has continued to appreciate unilaterally for 5 months. In view of the major international currencies, the euro and yen are not strong, and the exchange rate of the emerging market is under pressure, the US dollar rate hike is expected. The RMB effective exchange rate calculated by trade will remain the current appreciation trend.

Although the RMB starts the cycle of interest rate cuts, the US dollar will start the rate increase cycle next year, but the nominal exchange rate of the RMB against the US dollar will not show a trend of depreciation.

First, short term spreads will not lead to large fluctuations in exchange rates.

The short-term factor that affects exchange rate fluctuation is interest spread. The change of interest rates in the two countries often leads to exchange rate changes, but the prerequisite is capital free flow. Because RMB has not yet realized capital convertibility, there is still an obstacle to cross border capital flows. Although hot money flows through underground pipelines, considering that the renminbi still has room for appreciation and there is liquidity in the A share market, hot money will not give up short-term arbitrage opportunities in China.

While the Central Bank of China has cut interest rates slightly, the US still maintains low interest rates, with little change in interest rates, and short term is not enough to affect exchange rates. In other words, even if the funds are ironed out, the depreciation cycle will not occur.

Secondly, the two major factors that affect the medium and long term exchange rate are balance of payments and purchasing power parity.

　　。 In recent years, the growth rate of the surplus has been narrowed, and foreign exchange reserves have been even negative. Apart from the trade factors, China has taken the initiative to accelerate foreign investment. In the process of "deleveraging", the money supply growth slowed down. Although monetary policy released short-term easing signals, monetary regulation will be dominated by stock reform, so the general price level is relatively stable, and it will also support the stability of the RMB exchange rate.

Third, China will not seek to depreciate its currency.

This requires both the strategic demand of RMB internationalization and the need to fulfill the obligations of big powers in the short term. In the context of incomplete opening of the capital market, there is a lack of value preservation and value-added tools for offshore RMB assets. If the renminbi seeks to depreciate, it will probably affect the confidence of foreign investors in maintaining renminbi, thereby affecting the strategy of RMB internationalization. China will not disregard the big game in order to get short-term benefits. At the G20 summit in Brisbane, China promised to contribute to global growth, which made it impossible for China to depreciate the renminbi voluntarily. Hu Xiaolian, director of the State Administration of foreign exchange reserves, also said publicly on Thursday that the central bank has substantially reduced its direct participation in the foreign exchange market. That is to say, if there is no exchange rate impact, the central bank will not intervene in the trend of exchange rate.

It can be expected that within a certain period of time, the RMB exchange rate will remain stable and appreciably small. It is impossible for China to implement a large-scale fiscal stimulus policy, nor can the credit and money supply be too loose. The RMB exchange rate will not be reversed, but the appreciation will not be large enough, and the fluctuation will gradually be released.

As the export situation is not optimistic, a sharp rise in the surplus will not happen. Even if there is a sustained surplus, China will hedge its appreciation pressure by accelerating foreign investment.

Therefore, as a whole, the RMB exchange rate will gradually move closer to the equilibrium exchange rate. Before realizing full convertibility, the trend depreciation will not occur.