What Does China Mean By Issuing The New RMB Index?

Market participants are working hard to interpret the central bank's policy direction in the post SDR stage from the recent trend of RMB.

This week, more and more signals seem to point to the central bank's more tolerant attitude towards the depreciation of the renminbi.

Yesterday, China released the CFETS RMB exchange rate index, which includes 13 currencies.

Domestic commentators believe that this reflects the policy's intention to guide the market to change the view of the renminbi, and no longer regard it as a currency linked to the US dollar.

Some analysts believe that the Central Bank of China used to say that the renminbi was linked to a basket of currencies, which is still linked to the US dollar, but this time it emphasized the basket of currencies on the eve of the Fed's interest rate hike, and the rate increase might push the US dollar up.

Some analysts believe that the introduction of currency basket is a way to devalue the RMB against the US dollar.

Yesterday, the China Foreign Exchange Trading Center issued the CFETS RMB exchange rate index for the first time.

The index includes 13 currencies, of which the US dollar is 26.4% in a basket of currencies, the euro is 21.4%, and the yen is 14.7%.

On the day of the announcement, offshore renminbi fell to 6.56 against the US dollar, a four year low.

The offshore renminbi exchange rate closed at 6.4553 yesterday, a record low since August 2011.

As of yesterday, the RMB on the coast fell six times, the weekly decline was the largest since the new exchange reform in August.

On the same day, the official website of the Central Bank of China reproduced the commentary of China's currency net commentator, saying that the RMB exchange rate should not only be a reference to the US dollar, but also a reference to a basket of currencies.

The new RMB exchange rate index will help guide the market to change the habit of paying attention to the bilateral exchange rate between RMB and the US dollar in the past, and gradually use the effective exchange rate calculated in a basket of currencies as the main reference frame of the RMB exchange rate.

Standard Life Investments, a British asset management organization, believes that the new index of RMB exchange rate suggests that China may tolerate the depreciation of the RMB against the US dollar in order to prevent the RMB's trade weighted exchange rate from strengthening.

Alexander Wolf, an economist at the agency, thinks that

The Chinese government is trying to reset the RMB exchange rate forecast. "When they say that they want stability, the trade weighted exchange rate is stable, not the renminbi to the US dollar."

This opens the door for the depreciation of the RMB against the US dollar in the further strengthening of the US dollar. "

Britain mentioned that the Chinese government emphasized the basket of currencies for the RMB exchange rate, which made analysts feel that the Central Bank of China is preparing for the gradual depreciation of the renminbi.

Stephen Jen, co-founder of hedge fund SLJ Macro Partners, bluntly said: "announcing a basket of currencies or referring to a basket of currencies may also dispel the guilt of competitive devaluation for them."

Stuart Oakley, an emerging market manager at Nomura, said it was hard for the US government to accuse China of allowing the yuan to depreciate against the US dollar.

The bank also believes that if we emphasize a basket of currencies instead of US dollars, we may be "making excuses for depreciating against the US dollar".

It believes that the new RMB exchange rate index has little practical significance, and economic weakness, capital outflow and monetary easing all support the depreciation of the RMB.

The Central Bank of China should reduce intervention so that market pricing is an important step in marketization.

Mark Williams, chief China economist at Kay investment, pointed out that although the Central Bank of China used to say that it would link the renminbi to a basket of currencies, the renminbi continued to be linked to the US dollar, but this time it was different.

The timing of the announcement of the CFETS index is very important, just as the Federal Reserve, which may push the US dollar to strengthen, will raise interest rates.

If the renminbi continues to weaken against the backdrop of a stronger dollar, it should not be automatically interpreted as depreciation.

The important background of increasing interest rates is that when the US Federal Reserve prepares to raise interest rates, any emphasis on the exchange rate of RMB against a basket of currencies, not just against the US dollar, will give China greater room for operation.

Koon Chow, senior strategist at Union Bancaire Priv e e, a Swiss private bank, points out:

"They are preparing for raising interest rates for the Fed. It is expected that raising interest rates will raise the US dollar. They do not want to get into trouble in defending their currencies."

BBVA, Bilbao, Spain believes that the new index of the RMB exchange rate is essentially to convey information to the market. The RMB exchange rate will be an important reference in the future, and gradually float freely.

In the short term, the central bank will continue to prevent excessive depreciation.

The bank still expects that the yuan will depreciate to around 6.8 next year and then stabilize, which is about 3% depreciation against the US dollar.

Jens Nystedt, head of emerging market sovereign debt research at Morgan Stanley Investment Management Company, predicts that the RMB exchange rate may fall by 3%-5% next year, according to the basket of currencies mentioned above, and the RMB may have a one digit decline against the US dollar.

It believes that the new RMB exchange rate index lowers China's chances of devaluing the renminbi against the US dollar one step at a time. Before the Fed raises interest rates, it emphasizes that the basket of currencies means that the appreciation of the US dollar in the future does not necessarily mean that the renminbi will appreciate.