SMM News: the exchange rate of RMB against the US dollar is approaching the key psychological position. In the short term, there are certain pro-cyclical fluctuations in the foreign exchange market, and there is a risk of overshoot in the short-term exchange rate. It is necessary and reasonable to carry out counter-cyclical adjustment and play the role of macro-prudential policy in a timely manner. In the long run, there is no basis for a substantial devaluation of the RMB, and it is less likely that short-term fluctuations will evolve into disorderly devaluation.
The current round of devaluation of the renminbi against the dollar, which began in late April, was sudden and menacing. Market forces have dominated the recent adjustment of the RMB exchange rate. In the current round of RMB devaluation, the offshore RMB has been "ahead", followed by the onshore RMB market exchange rate, and finally the midpoint. According to statistics, from April 18 to May 17, the spot exchange rate of offshore RMB against the US dollar depreciated by 2719 points, by 4.07%, and the spot exchange rate of onshore RMB and US dollars depreciated by 2280 points, by 3.41%. The median price depreciated by 1749 points, or 2.61 per cent.
Among many market factors, external risk plays an important role, and the RMB exchange rate weakens rapidly due to the change of market sentiment. This scene is somewhat similar to the rapid devaluation of the renminbi in the second and third quarters of 2018.
A stronger dollar index puts downward pressure on non-US currencies. At present, the overall global economy continues to grow, but the performance of advanced economies is divided, the pattern of "the United States is strong and Europe is weak" shows signs of strengthening, and the dollar index strengthened again and rose above 98 at one point. Judging from the global market, the Brazilian real, the Korean won, the Argentine peso and so on have also depreciated rapidly against the US dollar recently.
The recent adjustment of the RMB exchange rate is clearly not intended to guide. On the contrary, the short-term rapid fluctuation of the exchange rate has attracted the attention of the relevant parties. The first quarter monetary policy report recently released by the central bank pointed out that we should strengthen macro-prudential management, stabilize market expectations, and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level. 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 with the media that he had the foundation, confidence, and ability to maintain the stable operation of China's foreign exchange market. We will maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.
It should be noted that there is no basis for a substantial devaluation of the RMB exchange rate. The economy has had a better-than-expected start to the year. At present, there has been no obvious change in the fundamentals of the economy, tax reduction and fee reduction and the "wide credit" policy to support the real economy have gradually taken effect, and the resilience of domestic economic growth is obvious. In the long run, China's development is still in a period of important strategic opportunities, with sufficient resilience, great potential, and continuous burst of innovative vitality, and the long-term trend of economic improvement has not and will not change. Economic fundamentals will continue to provide effective support for the RMB exchange rate.
However, it should also be noted that the domestic microeconomic subjects have not yet fully established the concept of financial neutrality, and the foreign exchange market is prone to the pro-cyclical behavior of "chasing sha and falling" and "herding effect", thus aggravating market volatility. This has happened many times in the past few years.
On May 20, the renminbi cut its midpoint against the dollar by 129 basis points to 6.8988, just 12 basis points short of 6.9. In the foreign exchange market, the offshore and onshore RMB exchange rate has already fallen below 6.9 against the US dollar, and the offshore RMB exchange rate has fallen to 6.9486 at one point. 6.9 broken, the next integer level is 7.
Whenever the exchange rate of the RMB against the US dollar approaches 7, the question of whether it will break 7 will trigger a heated debate in the market, and this time is no exception. Whether the RMB exchange rate must stick to a certain point is open to question. Many market participants believe that 7 as an important "psychological barrier", if it is broken through in the short term, it may further encourage the "herding effect", which may trigger an overshoot of the RMB exchange rate and may also aggravate the volatility of capital flows.
It is reasonable and necessary to give full play to the supporting role of counter-periodic adjustment in time. After the monetary policy report mentioned "strengthening macro-prudential management", Pan Gongsheng said in an interview with the media that the necessary counter-cyclical adjustment measures will be taken to strengthen macro-prudential management in the light of changes in the situation.
In recent years, the relevant departments have accumulated rich experience and sufficient policy tools in dealing with fluctuations in the foreign exchange market. Considering that China has more than US $3 trillion in foreign exchange reserves, it can play a strong role in supporting the RMB exchange rate. Short-term RMB fluctuations are less likely to evolve into disorderly devaluation.