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Will the history of the 9% surge in international bears in eight months repeat the history of the renminbi crisis breaking seven moments?

iconAug 28, 2018 18:45
Source:SMM
[editor's note] as the trade war between China and the United States intensified, the RMB was also besieged by international bears. However, at a time when she was on the verge of breaking 7, Yang Ma used her killer mace to make international bears fall twice in the same pit. What will happen this time when the yuan has soared 9% in eight months since the last sale?

SMM8 28: Trump's former private lawyer turned himself in and revealed a scandal over misappropriation of campaign funds. On that day, the dollar index fell below 95, the next day the dollar continued to fall sharply, commodities and other currencies rose sharply, everyone was happy.

Trump has had a hard time these days, so the opportunity for the yuan has come.

We know that the relationship between the US dollar and the RMB is a seesaw. Last year, the US dollar index was weak, the RMB maintained a strong appreciation, and so far this year, the US dollar has begun to rise strongly. The trend of the RMB has been questioned, and there has been a lot of talk that the RMB has broken 7.

Offshore RMB trend

Dollar trend

Some people say that breaking 7 is inevitable, and some people firmly believe that 7 as an integer psychological barrier, the central bank will certainly be unbreakable, in the end, what the trend is, I think we can get a peek at one or two through some data. First of all, there are two main factors affecting the RMB exchange rate, that is, the current account and the trade account.

The current account refers to the balance of import and export trade, trade surplus-exchange rate rise, trade deficit-exchange rate fall. The figure below shows China's trade balance data for the most recent year, with the exception of a small trade deficit in one month, a large trade surplus in all but one month.

Our country foreign exchange control is very strict, the foreign exchange earned by the enterprise export trade must go to the central bank to change into the corresponding RMB, can circulate, this is called foreign exchange occupation, since it is the trade surplus, the RMB should rise, right?

The capital account refers to the circulation of money, the flow of money-exchange rate rise, currency outflow-exchange rate fall. The following chart shows data on capital flows since 2017 and has long been dominated by inflows, which is one reason to support last year's surge in the renminbi. The strength of the dollar in recent months has indeed led to the flight of some capital, but the scale is too limited to shake the foundations of the stability of the renminbi.

This is not so much a fall as the dollar is too strong, because all but the dollar is falling, and even a few have collapsed. In the chart below, the renminbi performs about the same as the euro and sterling, making it the best performer among the BRICS countries. And the yuan has long been stable against a basket of currencies.

On August 21, the Director of the Monetary Policy Department of the people's Bank of China stressed: "the exchange rate is ultimately determined by economic fundamentals, and the fundamentals of the Chinese economy are stable and improving, providing strong support for the RMB exchange rate. We are confident and capable of maintaining the basic stability of the RMB exchange rate at a reasonable and balanced level. " Premier Li Keqiang has also stressed that China has no intention of promoting exports through the devaluation of the renminbi, and that there is no basis for sustained depreciation of the renminbi. The will at the top is so clear that it is impossible for the US to bring down the Chinese economy through a currency war to bring down the renminbi. To put it another way, there is something wrong with both accounts, and we still have the last supreme treasure, that is, the world's largest foreign exchange reserve. The chart below shows that our foreign exchange reserves are still rising. With the dollar so strong, the growth of foreign exchange reserves for two months in a row is rare in the world, and that is our strong backing and strength.

Taken together, the RMB in the long-term trend is not likely to continue to fall, break the seven theories or even collapse theory is groundless.

In addition, recently let the short eyes is Yang Ma's killer mace-"counter-cycle factor" restart!

"counter-periodic factor" refers to an adjustable part of the formation mechanism of foreign exchange intermediate price. It was originally set by the quotation banks on their own according to economic fundamentals. When there is a one-sided bullish or bearish market, the central bank will initiate a "counter-cyclical factor" to break the one-sided pro-cyclical judgment and let the market return to rational bilateral volatility. To a certain extent, this has protected the stability of the RMB exchange rate and cracked down on the speculative behavior of international financial speculators.

As early as May 2017, the central bank launched a "counter-cyclical factor." As shown in the figure below, after the exchange rate reform in 811 in 2015, the RMB continued to plummet, once reaching the level of 7. After the "counter-cyclical factor" was launched, the RMB soared by 9% in the next eight months. In January this year, the central bank announced a suspension. Then the yuan began to weaken again. You will find how similar history is, another collapse, and nearly breaking 7, when the "counter-cyclical factor" arrives as expected, and the central bank does do it on purpose, that is, to let international bears fall twice in the same place. Completely shatter the confidence of renminbi bears. And will the history of an eight-month surge of 9 per cent repeat itself? At a time when exports are already restricted in the current trade war, the rise of the renminbi will be a double whammy to exports, and perhaps the main purpose is to stabilize the exchange rate.

Wang Lijuan, a researcher at Hengfeng Bank, commented: although the RMB exchange rate has fallen overall recently, it has not continued the unilateral trend. While withdrawing from normal intervention, the central bank will carry out counter-cyclical adjustment when necessary to maintain the stability of the foreign exchange market. China Merchants Macro report said the restart of the "counter-cyclical factor" will help to divide the devaluation expectations and help ease the policy conflict between the exchange rate and interest rates. It can be seen that the market is generally optimistic about the long-term stability of RMB, which is a very important factor for the internationalization of RMB.

Compared with the RMB, our stock market is indeed not promising, but the state is also making efforts, including continuing to expand financial restrictions on foreign investment, encouraging foreigners to invest in the A-share market, and so on. As Chairman Mao said, things are changing. The great Chinese Dream of the Chinese nation needs our common efforts and testimony. Buffett once said that no one can make a fortune by shorting his own country. Our motherland is so strong now. We must have full confidence in our motherland and full of confidence in the future!

RMB
central bank
counter-cyclical factor
dollar

For queries, please contact Michael Jiang at michaeljiang@smm.cn

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