The Chinese yuan has been weakening against the US dollar for eight consecutive days, with a total reduction of 1931 basis points. Last Friday, the spot exchange rates of onshore and offshore RMB exchange rates opened lower. The RMB exchange rate in the offshore market fell below 6.65 at opening, while that in the onshore market almost fell below 6.65. However, near the midday, both onshore and offshore RMB exchange rates have risen against the US dollar. The onshore RMB exchange rate against the US dollar rose to around 6.60, and the offshore RMB exchange rate against the US dollar rose below 6.62.
This may be a microcosm of the RMB's recent exchange rate against the US dollar. Although the RMB's exchange rate against the US dollar has continued to fall, the sentiment on the offshore and offshore markets has remained stable. Analysts said that the recent weakening of the RMB exchange rate was a correction of the RMB's excessive appreciation. The two-way volatility and flexibility of the RMB exchange rate are conducive to the market-oriented mechanism.
The market is calm about the remarkable pullback of the RMB exchange rate. A number of bankers told reporters that some companies would choose to sell when the RMB exchange rate pulls back. At present, there are not many enterprises buying foreign currency blindly.
Guan Tao, a senior researcher at the China Finance 40 Forum, told reporters that the exchange rate price is functioning as leverage. At the beginning of the year, when the RMB appreciated, enterprises did not panic sell foreign currency assets, but moderately increased holdings of foreign currency. When the RMB depreciated in April and May, enterprises reduced foreign currency deposits and increased RMB holdings. This shows that the exchange rate marketization mechanism is operating well.
This can also be confirmed from the changes in foreign exchange deposit. According to data from the People’s Bank of China, China’s foreign exchange deposits for May amounted to 803.19 billion US dollars, a decrease of 13.172 billion US dollars from April.
A number of insiders said that the recent devaluation of the RMB has been driven by the rapid strength of the US dollar.
According to Zhang Jun, chief economist of Morgan Stanley Huaxin Securities, this is an amendment to the upward trend of the RMB exchange rate which was driven by the weakening of the US dollar. It was not because the RMB exchange rate under pressure again.
The devaluation of Chinese yuan against the US dollar previously made RMB appreciated significantly against other currencies of the currency basket. The China Foreign Exchange Trade System (CFETS) RMB index, which measures the yuan's strength relative to a basket of currencies, has risen from around 95 at the beginning of this year to near 97.
“Taking the recent devaluation into consideration, the effective exchange rate of yuan has already been close to equilibrium exchange rate in fact. The pressure of overestimation is released.” said Cheng Shi, chief economist at ICBC International.
The market staying calm is contributed by the sound economic fundamentals. “At present, the strong US dollar imposes pressure on currencies of emerging markets including RMB. However, in comparison with other countries, China’s economic fundamentals are more stable, and supply-side reform and deleveraging in financial market provide relatively enough space for policy decision-makers. Based on this, the market and investors did not turn to be pessimistic about expectation on RMB’s exchange rate and the A-share market,” Zhang Jun added.
China’s economy will register stable performance with good momentum for growth and demand for foreign exchange will get steadier in the second half of this year, which will strongly support RMB’s exchange rate.
In terms of the good economic fundamentals, “the improving earnings keep production activities active and boost private investment to go up. Leverage ratio of non-financial enterprises and financial sector both decline. Scale of shadow banking shrinks remarkably. Systematic risks are effectively curbed from source. All these lay foundation for the stable growth of RMB’s exchange rate,” said Cheng Shi.
Regarding to demand for foreign exchange, “the process of repaying external debts of non-residents.” Xie Yaxuan, analyst from China Merchants Securities, stated that China’s outstanding external debts has stopped decreasing since the second quarter of 2016 and totally increased by 346.1 billion US dollars. Foreign exchange demand has been changed into foreign exchange supply. Meanwhile, households and enterprises expectation on exchange rate gets stable and have decreasing demands for holding foreign exchange assets. In addition, liberation of securities market also bring sufficient supply of foreign exchange.
As for the future trend of RMB’s exchange rate, “the market needs to be adapted to normalization of fluctuation of RMB’s exchange rate and the fundamentals don’t support the exchange rate to have only appreciation or devaluation in the second half,” said Zhang Jun.
In contrast, the strengthening trend of US dollar may come to a conclusion. Zhang predicts that the economic growth driver of the US is likely to weaken in the third quarter, resulting in a reduction in return on US-dollar assets. Capitals will flow out of the country again by that time.
Translated By Coral Zhong & Vanessa Chen
This may be a microcosm of the RMB's recent exchange rate against the US dollar. Although the RMB's exchange rate against the US dollar has continued to fall, the sentiment on the offshore and offshore markets has remained stable. Analysts said that the recent weakening of the RMB exchange rate was a correction of the RMB's excessive appreciation. The two-way volatility and flexibility of the RMB exchange rate are conducive to the market-oriented mechanism.
The market is calm about the remarkable pullback of the RMB exchange rate. A number of bankers told reporters that some companies would choose to sell when the RMB exchange rate pulls back. At present, there are not many enterprises buying foreign currency blindly.
Guan Tao, a senior researcher at the China Finance 40 Forum, told reporters that the exchange rate price is functioning as leverage. At the beginning of the year, when the RMB appreciated, enterprises did not panic sell foreign currency assets, but moderately increased holdings of foreign currency. When the RMB depreciated in April and May, enterprises reduced foreign currency deposits and increased RMB holdings. This shows that the exchange rate marketization mechanism is operating well.
This can also be confirmed from the changes in foreign exchange deposit. According to data from the People’s Bank of China, China’s foreign exchange deposits for May amounted to 803.19 billion US dollars, a decrease of 13.172 billion US dollars from April.
A number of insiders said that the recent devaluation of the RMB has been driven by the rapid strength of the US dollar.
According to Zhang Jun, chief economist of Morgan Stanley Huaxin Securities, this is an amendment to the upward trend of the RMB exchange rate which was driven by the weakening of the US dollar. It was not because the RMB exchange rate under pressure again.
The devaluation of Chinese yuan against the US dollar previously made RMB appreciated significantly against other currencies of the currency basket. The China Foreign Exchange Trade System (CFETS) RMB index, which measures the yuan's strength relative to a basket of currencies, has risen from around 95 at the beginning of this year to near 97.
“Taking the recent devaluation into consideration, the effective exchange rate of yuan has already been close to equilibrium exchange rate in fact. The pressure of overestimation is released.” said Cheng Shi, chief economist at ICBC International.
The market staying calm is contributed by the sound economic fundamentals. “At present, the strong US dollar imposes pressure on currencies of emerging markets including RMB. However, in comparison with other countries, China’s economic fundamentals are more stable, and supply-side reform and deleveraging in financial market provide relatively enough space for policy decision-makers. Based on this, the market and investors did not turn to be pessimistic about expectation on RMB’s exchange rate and the A-share market,” Zhang Jun added.
China’s economy will register stable performance with good momentum for growth and demand for foreign exchange will get steadier in the second half of this year, which will strongly support RMB’s exchange rate.
In terms of the good economic fundamentals, “the improving earnings keep production activities active and boost private investment to go up. Leverage ratio of non-financial enterprises and financial sector both decline. Scale of shadow banking shrinks remarkably. Systematic risks are effectively curbed from source. All these lay foundation for the stable growth of RMB’s exchange rate,” said Cheng Shi.
Regarding to demand for foreign exchange, “the process of repaying external debts of non-residents.” Xie Yaxuan, analyst from China Merchants Securities, stated that China’s outstanding external debts has stopped decreasing since the second quarter of 2016 and totally increased by 346.1 billion US dollars. Foreign exchange demand has been changed into foreign exchange supply. Meanwhile, households and enterprises expectation on exchange rate gets stable and have decreasing demands for holding foreign exchange assets. In addition, liberation of securities market also bring sufficient supply of foreign exchange.
As for the future trend of RMB’s exchange rate, “the market needs to be adapted to normalization of fluctuation of RMB’s exchange rate and the fundamentals don’t support the exchange rate to have only appreciation or devaluation in the second half,” said Zhang Jun.
In contrast, the strengthening trend of US dollar may come to a conclusion. Zhang predicts that the economic growth driver of the US is likely to weaken in the third quarter, resulting in a reduction in return on US-dollar assets. Capitals will flow out of the country again by that time.
Translated By Coral Zhong & Vanessa Chen
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