What Is The Pressure Of Depreciation? None Of Them Has Been Heard Of.

Since the stock market crash in 2015, the yuan has been under pressure of devaluation.

In recent years, many overseas investment institutions have launched analysis reports, predicting that the RMB will continue to depreciate, and some even calculate the exact proportion of RMB being overvalued.

Many investment institutions directly suggest that the government depreciate the renminbi once and for all.

These analyses are also reflected in the foreign exchange market, leading to the recent increase in cross-border capital outflows.

Chinese leaders often participate in bilateral or multilateral policy consultations, and repeatedly commit themselves to undertake international responsibilities. Therefore, it is not likely to stabilize the economy through the devaluation of the renminbi.

The liquidity of the renminbi is the highest in the world. Therefore, as long as there is any exchange rate forecast, the liquidity of RMB will quickly turn to the pressure of cross border capital flows.

The structure of China's financial assets must be changed, and the cash and deposits of the US dollar will be gradually converted to other financial assets, especially the financial assets of bonds.

What factors led to the pressure of RMB depreciation?

There is a popular saying in the market that because of bad bank profits and poor profits of listed companies caused by bad debts, the quality of Chinese financial assets is not high, resulting in capital outflow and depreciation of the RMB. If the renminbi is expected to depreciate, investors should adopt a strategy of currency diversification when they allocate assets.

Because of the increasing popularity of these claims, a cycle of self actualization has been formed, which leads to real capital outflows, and the outflow of funds has strengthened the expectation of RMB depreciation in the foreign exchange market.

This logic of self circulation is common in the foreign exchange market.

In fact, all kinds of international financial theories emphasize repeatedly that exchange rate is an excess price. It can be fixed at a certain point, so that the price of assets and products will be adjusted spontaneously, and it can be appreciated or depreciated at any speed, so that asset prices and product prices can adapt to it.

In essence, the most fundamental factor is that the prices of products and capital prices among countries should be basically matched in the long run. In the short term, the exchange rate has multiple equilibria.

The current RMB exchange rate is a typical multiple equilibrium.

If we expect that the renminbi will depreciate, investors will convert large amounts of RMB into US dollars, resulting in large capital outflow and further devaluation of the exchange rate. If we expect the RMB exchange rate to be stable, the cross-border movement of capital market will be relatively stable, and the foreign exchange market will not be under pressure and the exchange rate will be stable.

The subtlety of this balance is that China's liquidity is the highest in the world.

Therefore, as long as there is any exchange rate forecast, the liquidity of RMB will quickly turn to the pressure of cross border capital flows.

There are various sources of pressure on the devaluation of the renminbi.

To sum up, these reasons are thought to come from five aspects.

The first is the tightening of the US dollar interest rate hike.

According to recent forecasts, the Federal Reserve has a high probability of raising interest rates in December 2016.

Indeed, the US economy has been showing good momentum recently, with the unemployment rate below 5%, and the slight increase in inflation. The US dollar has room to raise interest rates.

But even if the US dollar raises interest rates, the US dollar index will rise at about 2%-3%, which is not enough to cause the RMB to depreciate significantly.

Therefore, the US dollar interest rate increase is not enough to explain the current devaluation pressure of the RMB.

The second possible reason is the pressure on China's foreign trade.

In the 1-9 month of 2016, China's foreign trade and imports declined year by year, so some people say that the Chinese government hopes to promote imports and exports through depreciation.

But this explanation is equally untenable.

After all, China is still a current account surplus country.

If the currency is depreciated to boost imports and exports and continue to expand the surplus, the Chinese government will become a target in international policy circles.

Chinese leaders often participate in bilateral or multilateral policy consultations, and repeatedly commit themselves to undertake international responsibilities. Therefore, it is not likely to stabilize the economy through the devaluation of the renminbi.

Moreover, the proportion of exports to GDP has dropped sharply before the economic crisis. Therefore, devaluation of the RMB to stabilize the economy and promote exports is not a viable policy option.

The third possible reason is that the speed of "going out" of Chinese enterprises has accelerated and the demand has increased in the foreign exchange market.

This deserves more careful investigation.

You bet,

"Going global" has entered a climax, but we must see that China's capital (Hong Kong stock 3.97 -1.24%) account also has a large amount of capital inflow from foreign direct investment.

The "going out" of Chinese enterprises has its long-term and basic reasons, including acquiring foreign technology and brand, and obtaining overseas assets with synergy with domestic assets.

However, after all, the fundamental goal of Chinese enterprises' "going global" is to integrate domestic and foreign assets, and to manage the company culture inside and outside the country so as to achieve consistency between the two is not a day's work.

The ability of Chinese enterprises to acquire based on fundamentals can not rise rapidly within a few months.

Therefore, a purely fundamental acceleration of external investment can not explain the high speed of capital outflow from the corporate level.

The fourth frequently cited reason is that China's real estate has seen a new round of bubble rising trend in recent years.

Some people think that domestic houses are expensive and foreign houses are cheap, so residents are willing to turn to foreign houses and bring devaluation pressure on the RMB, which is the consequence of the domestic property bubble.

This reason can not withstand scrutiny.

First of all, the price of housing in different regions is hard to compare directly.

Real estate is real estate. The cheap luxury house in Kansas is not comparable to the expensive high priced houses in Beijing and Shanghai.

Moreover, most investors in the country do not know much about the housing situation abroad, and they are far from the real estate buying abroad.

Even those who really started to buy overseas buyers have encountered different problems.

For example, some real estate investors who poured into London in the early days, some of which had led to a decline in house prices due to the negative impact of the UK's negative EU business, and so far, assets could not be released; some of them were unable to redeem because of the freezing of real estate funds.

The painful experience of this kind of real estate investment is still fresh in many minds, and it is hard to fade away in a short time.

The fifth explanation for the depreciation of the RMB exchange rate is that the overall return rate of China's financial assets is not high, so funds go abroad to find a higher return on financial investment.

In the middle of this year, the stock market in New York and other places has reached a record high. In the short and medium term, the price of financial assets is difficult to keep up, but the risk of downlink is very large.

For example, in recent times, the US presidential election has been stalemate and media reports have led to a sharp fall in share prices.

On the contrary, China's blue chip stock price earnings ratio is lower than that of the United States.

Not to mention, the yield of China's financial products is higher than that of foreign counterparts.

Therefore, the return difference of financial assets can not explain the pressure of capital outflow and RMB depreciation.

Managing expectations, starting process, lowering the stock of money

According to the above analysis, the policy level is ready to come out.

In the short term, we must persist in managing the depreciation expectations of the renminbi and let the market understand that there is no motive for the fundamental depreciation of the RMB. The policy orientation is to maintain the basic stability of the RMB against the US dollar.

Specifically, the annual depreciation rate of RMB should not exceed 3%, because this is the spread of risk-free assets between China and the United States, that is, the return rate of RMB assets is higher than 3% of US dollar assets.

If devaluation exceeds 3%, it will stir up the outflow of capital and lead to self realization of devaluation expectations.

In the medium to long term, we must change the structure of China's financial assets, gradually convert the cash and deposits of the US dollar into other financial assets, especially the financial assets of bonds.

Compared with the high liquidity assets such as cash and bank deposits, other financial assets are difficult to move to the outside world driven by the devaluation of the RMB, because the price of these assets decreases with the devaluation of RMB and outflow of capital, and it is hard for investors to rush to sell at a time.

For example, if half of the liquid assets in China's economic system are converted into bond assets, when the capital outflows, the bondholders will sell the bonds, and the yield of the bonds will rise in reverse, automatically forming a feedback mechanism, which will lead investors who sell the bonds to think twice and reduce the pressure of outflow of funds.

The specific way of operation is to encourage high-quality companies to issue bonds, and appropriately increase the proportion of treasury bonds, so that corporate borrowers will gradually invest in debt rather than bank loans.

At the same time, it also guides depositors to convert some of their bank deposits into holding high quality bonds. Banks can also buy some of these high-quality bonds with a portion of their deposits instead of lending directly.

Why is China's way to reduce liquidity and maintain financial stability is not guiding capital into the stock market or new three boards? Because China's stock market, including the new three boards, is very weak. Once a large amount of capital is entered, the price of stocks will fluctuate and be greatly influenced by investor sentiment. This is not a good thing for China's economic stability.

In short, the pressure on the devaluation of the renminbi is self fulfilling expectations.

In response to this situation, we must firmly manage investor expectations and capital flows in the short term.

In the medium and long term, we must take effective measures from now on, gradually reduce China's stock of money and stabilize China's finance from the root. That is the real foundation of RMB internationalization.