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Whether the RMB devaluation is a favorable factor for China's market and economy? There are different opinions on the market.

The RMB exchange rate option implied RMB depreciation in 2016 to more than 7 probability has been greater than 1/3, which means that the expectation of depreciation has been formed, and is strengthening itself.

On the impact of exchange rate depreciation, the two sides still hold their own views.

It is worth noting that the impact of exchange rate depreciation on market paction pricing is not black and white.

It is a result of path dependence, which depends on the interpretation of the evolution of the RMB exchange rate policy by the international community.

We can review the different reactions of the market to the central bank's devaluation since the beginning of the RMB exchange rate reform in the past two years.

In December 18, 2013, the Federal Reserve announced its anticipated decision to reduce asset purchases.

The global market reacted strongly, except for mainland China and Hongkong.

The next day, despite the strong rebound in other Asian markets, the offshore / offshore Chinese stock market closed sharply down.

Why is that?

At that time, after the decision of the Federal Reserve, the Central Bank of China unexpectedly raised the central parity price of RMB, which was the largest since May 2013 - even though the depreciation rate was only 0.13% at that time, compared with the current fluctuation of the RMB exchange rate, the central bank had little idea.

The weakness of the stock market follows.

At that time, the trading logic of the market believed that the devaluation of the RMB was an important deflation factor in the global economy and a potential inducement in the currency war.

Because of the weakening of the renminbi, China's purchasing power of commodities has weakened and forced the price adjustment of risky assets.

We believe that the central bank's decision to substantially reduce the central parity of RMB was an important reason for the poor performance of China's offshore and offshore markets.

However, since March 2014, the logic of the paction has changed.

In March 2014, the Central Bank of China suddenly announced that the daily trading range of RMB would be expanded from 1% to 2%.

At that time, the market believed that the depreciation of the RMB would threaten the global economy.

Subsequently, volatility began to spread from the exchange market to the stock market.

The market continued to bear pressure in the following months - until the middle of 2014, the market gradually realized the advantages of RMB depreciation.

From then on, the stock market began to deviate from the exchange rate, and the trading pattern in the Chinese market changed.

The logic of the paction lasted until the further deepening of the exchange rate system reform in August 2015.

At that time, the Central Bank of China suddenly announced that it would make the market price play a greater role in the formation of the middle price of the RMB exchange rate and boldly reduce the central parity of the RMB exchange rate.

In the next two weeks, the Shanghai Composite Index [1.97%] plummeted more than 1000 points, which was more severe than the stock market crash that occurred in July last year due to strong financing.

Similar situations are most vividly illustrated in the four trading days since the new year.

The central bank boldly lowered the central parity of the RMB exchange rate, and superimposed the new fusing mechanism on the market to make the A share market and the global stock market again appear to be similar to the big fluctuations in August last year.

Generally speaking, in an inelastic exchange rate mechanism, before China's exchange rate reform, the Central Bank of China needs to use the RMB intermediate price to guide the market exchange rate to reflect changes in the fundamentals of the economy.

When the central bank refuses to adjust the exchange rate, the fundamental slowdown needs to be released through other relative price adjustments, such as commodity and asset prices.

After the Asian financial [0.00%] crisis in 1997, China resisted the pressure of exchange rate depreciation resistance, which was one of the important reasons why China's stock market fell more than 10% in 1998.

Today's central bank, while deepening the exchange rate reform, has spared no effort to intervene in the market price of the RMB exchange rate with its precious foreign exchange reserves.

This move has puzzled many market participants.

Exchange rate market volatility is endogenetic, unchanged from time to time.

But it is necessary to build up a "wall" to encircling the endogenous exchange rate fluctuations with precious external resources. This seems to be a natural rule for a culture obsessed with planning and control, just like the idea of building the Great Wall in ancient times.

Although the deepening of the exchange rate reform in August this year has induced a significant market adjustment, it has increased the elasticity of exchange rate, enabling China to better cope with external uncertainties, especially in the Fed's monetary policy entering a new interest rate cycle.

Therefore, although capital outflow and exchange rate spillover are still potential risks, investors should not pay too much attention to short-term market volatility.

As long as the depreciation of the exchange rate begins to correctly reflect the decline in China's interest rate and the fundamental slowdown, the central bank will no longer use its foreign exchange reserves to intervene in the market depreciation and induce the pressure of capital flight, and at the same time guide the RMB to depreciate in an orderly way, so the risk of exchange rate fluctuation should be controllable.

Over the past few years, China's economic fundamentals have slowed down, but the renminbi has appreciated instead.

Relative

The adjustment can only be reflected through deflation of commodity prices and pressure on stock market prices until the exchange rate reform started in March 2014.

This theory of relative asset price adjustment also explains why the Hongkong market has been inferior to A shares since the mid 2014.

As the Hong Kong dollar is pegged to the US dollar, the Hong Kong dollar exchange rate is not flexible enough to reflect the weak economic fundamentals.

Therefore, relative price adjustment can only be expressed through asset prices.

As can be seen from the above examples, the reaction of every market to the depreciation of the central bank is inconsistent.

Under the devaluation of the exchange rate, when the market believes that the devaluation is beneficial to the economy, the stock market does not rise; and when the currency is devalued, the panic falls.

Therefore, the most urgent task for market traders is to clarify the logic of market pactions, especially when the same exchange rate depreciation triggers two completely different trading results.

At present, the operation of the central bank's devaluation of the renminbi, especially those unexpected measures, is interpreted as currency competitive devaluation.

Such sudden devaluation will increase global deflationary pressure, limit the effectiveness of monetary policy, and even make it possible.

Back to the Great Depression of 30s.

However, the central bank has nothing to do. When the RMB depreciates in an orderly way, the market does not regard the fluctuation of the RMB exchange rate as the price of the paction.

The main factor is more emphasis on other pricing structures.

In Kafka's eyes, the existence of the Great Wall is markedly contrasted with her vague purpose.

However, the Great Wall seems to be hovering over the edge of his understanding.

Some say that this is because the imperial decree is built against the northern tribes.

However, Kafka thought that the intention of the Chinese royal family was not the whim of the rabble.

The idea of leading the group to build the Great Wall through imperial decrees has long existed since the barbaric era.

If so, northern tribes are not the real reason for building the Great Wall.

Perhaps the answer lies in the Chinese culture itself.