It Is Time For The Renminbi To Decouple From The US Dollar.

The main culprit is the strong dollar.

For example, since the beginning of 2014, the euro and yen have depreciated by 15% against the US dollar.

Although the performance of the renminbi is better than that of most major countries and emerging markets, the yuan is still depreciating against the US dollar.

According to the bank for International Settlements, the yuan increased by 7% in real effective exchange rate in 2014, and it is one of the few strong currencies in the world.

The second is the divergence of monetary policy between China and the United States.

The Fed has stopped the QE and is expected to enter the rate hike soon. The Central Bank of China has entered the cycle of monetary easing.

Therefore, the expected interest rate difference between the two currencies is gradually decreasing.

The third factor involves currency valuation.

Over the past ten years, the renminbi has appreciated by 50%, which is unmatched by many developed and emerging market currencies.

Although China's economic growth rate is still high, people still have to ask a question whether the RMB has reached the fair value or is overestimated. In simple terms, after a long period of appreciation, the market's consensus on RMB undervaluation has been greatly weakened.

Fourth, more and more market participants are beginning to worry about the increasing pressure of China's financial system.

Exchange rate is one of the most important financial asset prices. How can people expect China's financial system to become increasingly fragile while the renminbi is still strong?

Finally, the central bank seems to have adopted a more lenient approach to the RMB exchange rate.

Since 2014, the PBOC has reduced its intervention in the foreign exchange market and widened its daytime trading range.

But it also occasionally intervened in the market, breaking arbitrage trading expectations and successfully releasing two-way volatility signals.

In Hongkong, the increasingly active offshore renminbi trading market has increased its interaction with the offshore renminbi market.

Risk sentiment may play a more important role in the fluctuation of RMB exchange rate.

We expect offshore renminbi pactions to exceed two times that of last year.

In general, a strong dollar.

Divergence, currency valuation worries and less central bank intervention all play a role in wavering currency expectations, increasing volatility and narrowing interest rates.

As a result, the potential SHARP index slipped, prompting more and more Chinese companies to hedge against the US dollar, so we saw the increase in US dollar savings and the rapid repayment of US dollar debt, which is estimated to exceed US $one trillion in 2014.

In addition, more and more Chinese companies are buying overseas, which also exacerbates China's demand for the US dollar.

In terms of balance of payments, capital outflow in the fourth quarter of 2014 hit a 16 year high and official foreign exchange reserves also declined steadily since the middle of 2014 (though partly because of the depreciation of the renminbi).

On the whole, the demand for us dollar is increasing, and the exchange rate of RMB against the US dollar is also weakened.

What will happen next? Much of that depends on how the Chinese central bank should respond to the demand of Chinese enterprises for the US dollar.

I envisage three possibilities:

First, the Central Bank of China may strengthen its strategy of pegging the dollar, just like the global financial crisis in 2008 and the Asian financial crisis in 1998.

The result may be a serious deflation in the Chinese economy in a sustained environment of the dollar.

In this case, the loosened currency peg will be tightened.

Second,

It is possible to take the "laissez faire" policy, stand aside, expand the trading range, and let the money market self pricing.

This may lead to sharp fluctuations in Renminbi and even some pressure from enterprises unless capital controls are greatly strengthened.

If this happens, the decoupling of the renminbi from the US dollar may develop rapidly.

The third is also more likely to happen.

More freely fluctuating, but at the same time, staring closely at cross-border capital flows, ready to sell dollar reserves.

If this happens, the renminbi will further decouple from the US dollar further.

For the following reasons, the last method is the most effective.

In the short term, it can help stabilize the effective exchange rate and adjust the arbitrage pactions of Chinese enterprises in an orderly way, so as to match China's monetary easing policy.

In the long run, it will help to promote two-way exchange rate, and ultimately achieve the complete withdrawal of interest rate control and liberalization of capital account.

The RMB has been linked to the US dollar for 20 years, and has become more and more relaxed in recent years.

This exchange rate system is well suited to the development of China's economy, but now is the time to change.

First, as the world's largest trading country and the second largest economy, no matter which currency is closely watched, even in a loose way, China's volume is too large. Second, before full liberalization of interest rates and massive capital liberalization, what is needed is a more flexible RMB. Third, because of the hedging property of the US dollar, pegging the US dollar usually amplifies the impact of external shocks on China's economy. Finally, the United States no longer welcomes the linkage between the RMB and the US dollar, but at the same time maintains "one way elasticity".