RMB Exchange Rate: Balancing Two-Way Fluctuations

Since the third quarter of this year, especially in September, the "strong appreciation" has become the main theme of the RMB exchange rate.

Data shows that as of the closing on September 30th Beijing time, the offshore RMB against the US dollar has accumulated an increase of 2,900 basis points, an increase of about 4%; the onshore RMB against the US dollar has accumulated an increase of more than 2,500 basis points, an increase of about 3.44%.

In this regard, many industry insiders pointed out in an interview with 21st Century Economic Report reporters that this round of RMB appreciation is mainly driven by the resonance of internal and external changes such as the Fed's interest rate cuts and the increase in counter-cyclical policy supply, as well as market sentiment that also forms a strong disturbance to the RMB trend in the short term.

Looking forward to the future, the above-mentioned people all said that with the convergence of China-US monetary policy and the counter-cyclical policy, the RMB exchange rate is expected to continue to improve, and it may maintain an appreciation trend in the short term, but the possibility of a large increase is small, and it is more likely to approach a two-way fluctuation trend in the long term.

At 19:00 on October 11th Beijing time, the onshore RMB exchange rate against the US dollar was reported at 7.0675 yuan, down 112 basis points from the previous trading day; the offshore RMB exchange rate against the US dollar was reported at 7.0725 yuan, down 106 basis points from the previous trading day. On the same day, the RMB exchange rate against the US dollar was reported at 7.0731 yuan, up 11 basis points.

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RMB turned from a decline to an increase within the year

The RMB exchange rate has fluctuated and increased since the third quarter, especially in September, it further rebounded and set a new high for the year, recording the largest increase since 2011, which directly prompted the RMB exchange rate to completely reverse the downward trend and turned from a decline to an increase within the year.

Looking back, Wang Qing, the chief macro analyst of Orient Jincheng, said to the reporter that the current RMB exchange rate is mainly influenced by two factors: one is the trend of the US dollar, which will cause the RMB exchange rate against the US dollar to passively appreciate or depreciate; the second is the domestic macroeconomic trend, which determines the intrinsic appreciation or depreciation momentum of the RMB.

Xiao Yu, a researcher at the Institute of Asia-Pacific and Global Strategy of the Chinese Academy of Social Sciences, pointed out to the reporter that the core driving force of this round of RMB appreciation is the weakness of the US dollar caused by the Fed's interest rate cut operations. Data shows that on September 18th, the Fed officially started the interest rate cut cycle, with the first interest rate cut reaching 50BP, and the US dollar index subsequently refreshed the new low for the year to 100.8.On September 24th, the State Council Information Office held a press conference where Pan Gongsheng, Governor of the People's Bank of China, Li Yunze, Director of the State Financial Regulatory Administration, and Wu Qing, Chairman of the China Securities Regulatory Commission, introduced the financial support for high-quality economic development and announced a new round of financial support policies. Subsequently, the Central Political Bureau meeting held on September 26th proposed to increase the support of fiscal and monetary policies.

With the introduction and rapid implementation of a package of incremental policies, the appreciation of the RMB exchange rate has significantly accelerated. In September, the onshore RMB against the US dollar rose by 725 basis points to 7.0156; the offshore RMB against the US dollar rose by 826 points to 7.0074, breaking through the "7" threshold at one point; the RMB against the US dollar midpoint was adjusted up by 1050 basis points to 7.0074.

Xiao Yu further pointed out that with the start of the new round of interest rate cuts by the Federal Reserve and the gradual introduction of a package of domestic economic growth policies, the short-term trend of the RMB exchange rate has been more strongly supported under the confirmed fundamentals, but the possibility of a significant appreciation is not high. The China International Capital Corporation (CICC) foreign exchange team also pointed out in its research report that the appreciation trend of the RMB exchange rate may continue, but it will maintain a two-way fluctuation pattern with both gains and losses.

In the short term, attention needs to be paid to the impact of foreign exchange settlement and sale.

The short-term impact of corporate foreign exchange settlement and sale on the RMB exchange rate has been placed in focus. China's foreign exchange reserves were about 3.3 trillion US dollars as of September this year, and many Chinese exporters have accumulated US dollars through overseas business. It was previously reported in the media that Chinese state-owned banks bought US dollars in the onshore market in September to slow down the appreciation of the RMB.

The trend of importers' foreign exchange settlement and sale is also worth paying attention to. The deficit in bank foreign exchange settlement and sale narrowed significantly after entering August, narrowing from -54.51 billion US dollars in July to -1.21 billion US dollars, the best performance since February this year. The bank's foreign exchange settlement and sale business on behalf of customers turned from a deficit to a surplus of 91 million US dollars, indicating that a large number of foreign trade enterprises chose to settle.

Wang Qing predicted that the optimistic sentiment in the foreign exchange market in September will further ferment, and the scale of the surplus in bank foreign exchange settlement and sale on behalf of customers may expand, which may also be a catalytic factor for the RMB's faster appreciation against the US dollar that month. Considering the high backlog of exporters' settlement demand, it is necessary to moderately guard against the over-adjustment effect that may be brought about by the resonance of "RMB appreciation - increase in settlement demand". It can be seen that after the end of August, the RMB midpoint adjustment has begun to shift towards curbing excessive appreciation.

Xiao Yu reminded that in the short term, attention needs to be paid to the strengthening of foreign trade enterprises' willingness to settle and sell foreign exchange, leading to a time mismatch in the supply and demand of foreign exchange at the entity level, which may "shrink" the support for the RMB exchange rate at some point in the future.The conditions for reassessment are not yet ripe

After the National Day holiday, the RMB exchange rate experienced a significant correction. Taking the first trading day after the holiday as an example, the onshore RMB exchange rate against the US dollar closed at 7.0535 yuan, down 379 points from the previous trading day; the RMB exchange rate central parity rate was reported at 7.0709 yuan, down 635 basis points from the previous trading day, setting the largest depreciation since May 6, 2022.

In response, the market generally believes that the post-holiday weakening of the RMB is mainly a reasonable adjustment to the rapid appreciation of the RMB against the US dollar in the near past. "Recently, influenced by Federal Reserve Chairman Powell's statement that 'interest rate cuts will be gradual', a significant rise in US Treasury yields, and the new Japanese government's statement that 'there is no environment for further interest rate hikes at present', the US dollar has appreciated significantly against the euro and yen, driving the US dollar index to rise notably," Wang Qing pointed out. This is the main reason for the relatively large adjustment of the RMB exchange rate against the US dollar after the "October 1st" long holiday, which is a passive depreciation of the RMB against the US dollar caused by the rise of the US dollar index, and does not represent an inherent depreciation pressure on the RMB.

The latest data shows that the US non-farm employment increased by 254,000 people in September, far exceeding expectations (150,000 people). The relative strength of the economy and the labor market has reduced the market's expectations for significant interest rate cuts. It is expected that the Federal Reserve will cut interest rates by 25 basis points each in November and December, and the inflow of safe-haven funds has also boosted the US dollar.

Wang Qing further pointed out that the adjustment range of the RMB exchange rate after the holiday is significantly lower than the rise of the US dollar. This is due to the continuous introduction of a package of incremental policies since September 24, which has boosted the sentiment in the foreign exchange market and provided stronger support for the RMB. It is expected that the CFETS and other three "basket of RMB" exchange rate indices, which represent the overall exchange rate level, will rise steadily. The short-term trend of the US dollar and the pace and scale of the introduction of domestic incremental policies remain the main factors affecting the RMB exchange rate.

Under the rise and fall of the RMB exchange rate, discussions on the reassessment of the reasonable fluctuation range of the RMB have increased.

In Wang Qing's view, in the short term, the foreign exchange market is influenced not only by fundamentals and policies but also by market sentiment, which should not be underestimated. In addition, the central parity adjustment mechanism also plays an important role, making it difficult to judge the market's incorporation of this round of incremental policies, and the package of incremental policies itself is being introduced in a continuous process.

From the recent market performance, assuming that the US dollar does not experience significant fluctuations, it is more likely that the RMB will operate in the range of 7.0 to 7.1 in the next period. He added that after the impact of the package of incremental policies on the real estate market and the macroeconomy becomes more certain, it may be more suitable to reassess the reasonable range of the RMB.

Xiao Yu believes that it may be too early to discuss the reassessment of the RMB range at present. There is uncertainty in the trend of the US dollar after the US election, and it is possible that changes in key indicators may lead to marginal adjustments in the Federal Reserve's monetary policy. Domestic exports remain an important force in driving economic growth, and any marginal reassessment may impact the current foreign trade enterprises, which requires systematic consideration.

Zhou Maohua, a macro researcher at the financial market department of China Everbright Bank, said in an interview with 21st Century Economic Report that, looking at the market trend, the RMB market expectations are stable, and the market digests internal and external events relatively quickly. Combining the trend of the RMB exchange rate against a basket of currencies (CFETS), the overall operation of the RMB exchange rate is stable.Guarding Against Exchange Rate Overshooting Risks

This year, the People's Bank of China (PBOC) has repeatedly emphasized the need to guard against the risks of exchange rate overshooting. On September 24th, Pan Gongsheng pointed out at a press conference held by the State Council Information Office that the PBOC's stance on exchange rate policy is clear and transparent. There are several key points: First, to adhere to the market's decisive role in the formation of exchange rates and maintain exchange rate flexibility. Second, to strengthen expectation guidance to prevent the foreign exchange market from forming a one-sided consensus expectation and self-fulfilling it, to guard against the risks of exchange rate overshooting, and to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.

In this regard, Wang Qing analyzed that paying attention to the "risk of RMB exchange rate overshooting" mainly refers to guarding against sharp rises and falls of the RMB deviating from the trend of the US dollar in the short term. This is a foothold for maintaining the basic stability of the RMB at a reasonable and balanced level at present. Currently, it is mainly to guard against the sharp fluctuations in capital market sentiment catalyzed by the gradual introduction of a basket of incremental policies, which could lead to significant ups and downs of the RMB against the US dollar in the short term.

Wang Qing expects that with the implementation and effectiveness of a basket of incremental policies, the economic growth momentum in the fourth quarter will significantly improve, and the RMB is expected to continue its recent strong state. In terms of the US dollar trend, the Federal Reserve's interest rate reduction process will continue, and the "US strong, Europe weak" situation in the economic fundamentals of 2025 will ease somewhat, limiting the space for a significant rise in the US dollar index. This means that the passive depreciation pressure of the RMB against the US dollar is controllable. At the same time, it is believed that whether the real estate market can successfully achieve a soft landing in the medium term will be the key to determining the intrinsic momentum of the RMB's operation.

Xiao Yu said that although short-term fluctuations have increased, the risk of RMB exchange rate overshooting is not significant. The main reason is that China has a strong ability to balance international payments. It is highly probable that the RMB exchange rate will increase in two-way fluctuations on the basis of maintaining stability. He believes that the short-term and medium-term RMB exchange rate is mainly affected by the marginal changes in the financial market, and currently, the possibility of increased two-way fluctuations is increasing. In the long term, the marginal increase of the RMB exchange rate on the basis of maintaining increased two-way fluctuations is in line with the law of economic growth, which is also the fundamental logic behind foreign capital's optimism about the Chinese market.

"The current account surplus to GDP ratio in the first half of the year was 1.1%, which should be said to be in a relatively reasonable range." Pan Gongsheng also pointed out at the press conference that China's international payments have remained basically stable. The latest data from the State Administration of Foreign Exchange show that as of the end of September this year, China's foreign exchange reserves were $3.3164 trillion, an increase of $28.2 billion from the end of August, an increase of 0.86%.

Asia-Pacific Emerging Assets to Benefit

The appreciation of the RMB will trigger a spillover effect, and the Federal Reserve's interest rate cut in September has also prompted investors to seek high-yield assets in Asia. The Malaysian ringgit, Thai baht, and Indonesian rupiah have appreciated significantly. Although the US dollar rebounded against the backdrop of escalating geopolitical conflicts in the Middle East, the market expects that Asian currencies will continue to appreciate.Nguyen Trinh, Senior Economist for Asia Emerging Markets at Natixis, stated that the trend of weakening Asian currencies is reversing, and they are now in a phase of US dollar depreciation. A stronger Chinese economy could be beneficial for other Asian currencies.

Goldman Sachs pointed out that there is reason to be cautious about other safe-haven currencies (such as the yen and Swiss franc), considering the US dollar as the best choice for risk aversion. However, it still believes that under the main macro trend of robust US economic activity, cyclical currencies like the British pound and Australian dollar may perform relatively better.

Considering the varying sensitivity of different foreign exchange markets to the performance of Chinese assets, Goldman Sachs expects that if stimulus measures are less strongly correlated with infrastructure spending and more focused on supporting domestic stocks, the reaction of some emerging market commodity currencies (Australian dollar, South African rand, and Latin American foreign exchange) might be more moderate compared to previous Chinese stimulus measures. If China's stimulus measures focus more on domestic consumption and capital market sentiment, Asian emerging market currencies (such as the Korean won and Thai baht) could become more apparent winners. Additionally, overall, G10 currencies are currently most sensitive to the trend of the renminbi, but are limited in their influence by the trend of China's stock market (with the exception of the Australian and New Zealand dollars).

However, Goldman Sachs also warns that although there is a positive correlation between CNH and expectations for China's economic growth, these two variables do not always move in the same direction, depending on the underlying driving factors. Goldman Sachs recently ended its short recommendation for the renminbi, noting that stimulus measures seem to be squeezing out the remaining (renminbi) shorts.

According to Macquarie's foreign exchange strategists, as the US presidential election approaches, the renminbi needs to digest the possibility of the US imposing higher tariffs on China after the election.

"On the eve of the US election, it is expected that the offshore renminbi will nervously stabilize around 7.10," the institution's strategists predict that if Trump wins, the offshore renminbi will climb towards 7.30 by early 2025, and if Harris wins, the exchange rate will drop to 6.95.

Huatai Futures pointed out that after entering October, the exchange rate market was mainly influenced by the positive US non-farm data and the strengthening US dollar index. The offshore renminbi was relatively weak, breaking through the 7.1 threshold, and the difference between the offshore and onshore exchange rates widened. At the same time, the forward basis and swap points continued to decline, showing an increased expectation of future renminbi volatility stability in the market.

"It is important to let the fluctuation of the renminbi exchange rate reflect the fundamentals and the balance of payments situation," said Zhou Maohua. In the long term, the renminbi exchange rate is expected to show a stable and rising trend, mainly due to the gradual release of domestic economic and market potential, improvement in economic efficiency, and the trend of global capital inflow attracted by renminbi assets, which is expected to steadily appreciate the renminbi exchange rate. However, there are fluctuations and repetitions in the short-term trend of the renminbi. The first wave is driven by economic recovery, foreign trade resilience, and US dollar depreciation; the second wave is driven by more macro policy effects, economic recovery, the trend of renminbi assets attracting capital inflow, and the US interest rate reduction cycle.

China's monetary and fiscal policies are working together, and the policies will gradually take effect. Fidelity stated that due to the continuous improvement of China's economic fundamentals and the attractiveness of valuations, investors are once again focusing on investment opportunities in the Chinese market. The market generally expects that leading internet and consumer industries in Hong Kong stocks are expected to benefit from the Federal Reserve's interest rate cuts and China's policy adjustments.