SMM News: with the implementation of further tariffs imposed by the United States on China, the uncertainty of Sino-US trade frictions has intensified. The RMB exchange rate is under pressure, but we should guard against the overshoot of the RMB in the direction of devaluation. We believe that the current break of the "7" exchange rate of the RMB against the US dollar is generally not in line with China's interests and does more harm to China than good.
If the exchange rate falls below the key point, it may have a greater impact on market confidence, increase the pressure on capital outflows, and may even "give people a handle" in the future Sino-US economic and trade negotiations. In addition, the role of exchange rate depreciation in promoting China's foreign trade is limited, and it is far more effective to enhance the competitiveness of China's foreign trade products than to gain price advantage through exchange rate depreciation. As President Xi Jinping pointed out in his speech at the "Belt and Road Initiative" summit forum, "if China does not engage in beggar-thy-neighbour exchange rate depreciation, it will constantly improve the RMB exchange rate formation mechanism and enable the market to play a decisive role in the allocation of resources. We will maintain the basic stability of the RMB exchange rate at a reasonable and balanced level and promote the stability of the world economy. "
We should draw lessons from Japan, not extend from trade frictions to financial frictions, neither guide exchange rate depreciation nor allow the exchange rate to appreciate substantially. On 19 May, Pan Gongsheng, deputy governor of the people's Bank of China and director of the State Administration of Foreign Exchange, said in an interview on the current operation of China's financial and foreign exchange markets: "since the beginning of this year, China's foreign exchange market has been running smoothly and overseas capital inflows have increased. Foreign exchange reserves have risen steadily, and the foreign exchange market is expected to be stable as a whole. "at the same time, the people's Bank of China" has the full foundation, confidence, and ability to maintain the stable operation of China's foreign exchange market. " To maintain the basic stability of the RMB exchange rate at a reasonable and balanced level. " After the United States imposed tariffs, the devaluation of the RMB exchange rate against the US dollar to a certain extent is a normal market reaction, but it should also be treated rationally and cautiously.
It is difficult for the United States to impose tariffs to change the trend of steady Economic Development in China
At present, China's economy has gradually stabilized. It is difficult for the United States to impose tariffs to change the trend of steady economic development in China. The RMB does not have an economic basis for devaluation.
Although the United States has formally raised tariffs on $200 billion worth of Chinese imports to the United States from 10 per cent to 25 per cent, the impact of US tariffs should be seen in a dynamic and comprehensive manner. According to the calculations of relevant market institutions, only considering the static impact on the export sector, the United States will impose a 25 per cent tariff on US $200 billion goods, which will drag down China's GDP growth rate of 0.2 to 0.65 percentage points. According to the IMF World Economic Outlook, if China and the United States impose a full 25 per cent tariff on all goods from each other, it will drag down China's economic growth by 0.5 to 1.5 percentage points. If viewed dynamically, the actual impact of tariffs imposed by the United States may be even smaller. This is because many factors will change, such as the adjustment of the total volume and structure of bilateral trade between China and the United States, the mutual transfer of tariffs in traded goods, and the exchange rate. Markets have always spontaneously sought ways to reduce transaction costs, which helps hedge against the additional costs of imposing tariffs in the US.
Under the dynamic adjustment of economy, China's export structure is becoming more and more diversified, and the service trade is developing continuously. From January to April this year, the United States accounted for 11.5 percent of China's total trade, 5.9 percent of imports and 16.4 percent of exports, down 2.2, 1.4 and 2.8 percentage points from last year. The share of the European Union (EU) and ASEAN in China's total trade volume was 15.7% and 13.4% respectively, an increase of 0.9% and 0.6% over last year. China's total trade with countries along the "Belt and Road Initiative" line has accounted for 28.7 percent of China's total foreign trade, an increase of 1.3 percentage points over the same period last year. In the first quarter of this year, China's trade deficit in services fell by 14.3% as a whole, and exports of trade in services increased by 14.3% over the same period last year. In China's trade in services, the export of knowledge-intensive services such as intellectual property rights royalties, telecommunications computers and information services, other commercial services and insurance services increased by 52.4%, 15.1%, 14.1% and 11.7% respectively compared with the same period last year.
At the same time, China has made continuous progress in readjusting its economic structure and deepening reform. The contribution of net exports to China's economic growth is very limited, and domestic demand has become the main driving force to promote China's economic growth. China's import and export trade surplus narrowed to $422.54 billion in 2017 and $351.76 billion in 2018, resulting in net exports contributing-8.6 per cent to GDP growth in 2018. In 2018, the contribution of final consumer spending to GDP growth was as high as 76.2%, an increase of 32 percentage points over the past 10 years, with an average annual increase of more than 3 percentage points. It is an important support for stable growth to promote the high-quality development of the manufacturing industry in China. At present, the investment structure of the manufacturing industry is constantly optimized. From January to April this year, five sectors, namely, special equipment manufacturing, computer communications and other electronic equipment manufacturing, chemical raw materials and chemical products manufacturing, pharmaceutical manufacturing and general equipment manufacturing, contributed 75 percent of the growth in manufacturing investment.
A sharp devaluation of the exchange rate is not conducive to China's opening up to the outside world
Devaluation of the exchange rate will bring a lot of problems, often outweigh the losses. On the other hand, the basically stable exchange rates of various countries are of great significance to international trade, which can greatly reduce the transaction costs of international trade and investment, expand the scope of economic entities participating in cross-border economic activities, and promote the stability of the world economy. Maintaining the basic stability of the RMB exchange rate at a reasonable and balanced level is conducive to international macro-policy coordination, produces positive spillover effects, and promotes win-win cooperation between China and major economies and trading partners. At present, China's absorption of foreign investment has increased steadily, and the structure has been continuously optimized. The basic stability of the RMB exchange rate is the basic condition to maintain this good situation.
From January to April this year, more than 13000 new foreign-invested enterprises were established throughout the country, with actual foreign investment of 305.24 billion yuan, an increase of 6.4 per cent over the same period last year (excluding banking, securities and insurance). In April, the amount of foreign investment actually used was 62.95 billion yuan, an increase of 6.3 per cent over the same period last year. Even after a year of Sino-US economic and trade frictions, US investment in China has increased by 24.3 per cent. In addition, the use of foreign investment in China's high-tech manufacturing industry and high-tech service industry has increased significantly. From January to April this year, the actual foreign investment used in the high-tech manufacturing industry was 33.41 billion yuan, an increase of 12.3 percent over the same period last year, and that in the high-tech service industry was 52.48 billion yuan, an increase of 73.4 percent over the same period last year. From this we can see that international investors have confidence in China's future development.
People's confidence and financial stability are often positive feedback and mutually reinforcing. Historically, as early as the "Green money period" of the American Civil War (1867-1879), although prices rose and the government borrowed heavily, capital flowed into the United States in large quantities because people were expected to prefer the appreciation of green money (US dollars) in the future. Reduced the depreciation of the dollar. As the war ended and more long-term capital flowed into the United States, the green note appreciated by 30%.
After years of reform, RMB exchange rate pricing has become more and more market-oriented. In recent years, the impact of capital flows on the RMB exchange rate is increasing, the asset price attribute of the exchange rate is increasing, and the market expectation has become an important factor affecting the RMB exchange rate. From the perspective of market trading, the exchange rate falling below the key level will lead to a large area of stop-loss trading, artificially "create" exchange rate depreciation, but also make the main body of the original wait-and-see trading enter the market in the direction of short positions. All these factors will cause the exchange rate to overshoot. Expectations are a major factor affecting short-term exchange rates. Once the important psychological barrier breaks through, it will trigger a readjustment of market expectations and further downgrade the valuation of the exchange rate. As expectations are self-fulfilling and self-reinforcing, attention should be paid to the impact of key points on market expectations.
At present, breaking "7" does more harm than good, and it should be avoided as far as possible.
In the process of trade friction, the range of tariff can be controlled, and even the tariff can be abolished, but the impact of financial friction is difficult to reverse, and it is difficult to control the extent of its impact.
At present, the RMB exchange rate breaking "7" is generally not in line with China's interests, and does more harm to China than good. If the exchange rate falls below the key point, it may have a greater impact on market confidence, increase the pressure of capital outflow, and may even "give people a handle" in the future Sino-US economic and trade negotiations, thus complicating the problem and leading to the escalation of trade frictions. At present, the United States does not list China as a currency manipulator. In fact, a sharp devaluation of the renminbi is also what the United States does not want. What's more, we can't continue to rely on low prices to gain a competitive advantage. Allowing the devaluation of RMB is difficult to encourage enterprises to improve product quality and enhance core competitiveness. Of course, the exchange rate should not be allowed to appreciate significantly, and the overshoot of the RMB exchange rate in the direction of appreciation should also be avoided.
At present, the people's Bank of China adheres to a prudent monetary policy that is loose and moderate, keeps the general gate of the money supply good, does not carry out "flood flooding", and maintains reasonable and abundant liquidity at the same time. The growth rate of broad money M2 and the scale of social financing should match the nominal growth rate of gross domestic product (GDP). The combination of a prudent monetary policy and a positive fiscal policy has promoted the growth of China's domestic demand, which itself is conducive to the export and GDP growth of our trading partners, and at the same time is conducive to domestic risk prevention, reform, and stable growth. It also helps to avoid the emergence of asset price bubbles, leading to negative spillover effects.
In a word, China's economic and financial macro-control tools are sufficient, space is sufficient, and the overall economic operation is stable, so it is necessary to maintain stability, enhance endurance, and have the courage to overcome difficulties. We should maintain the basic stability of the RMB exchange rate at a reasonable and balanced level, improve the RMB exchange rate formation mechanism, and allow the market to allocate resources rationally on an objective and rational basis.