Falling below 7.2! The RMB exchange rate has returned to a downward trend this week, will it continue to decline in the future?

Falling below 7.2! The RMB exchange rate has returned to a downward trend this week, will it continue to decline in the future?

How do changes in the international market affect asset prices? The exchange rate is a sufficiently typical sample.

The significant increase in exchange costs "is a particularly deep feeling among all parties in the market during this period - in June last year, it required about 67000 yuan to exchange 10000 US dollars within China; By June of this year, this number had become approximately 72000 RMB.

This change is clearly reflected in the trend chart of the RMB against the US dollar exchange rate. Looking at the past six months alone, the exchange rate of the Chinese yuan against the US dollar has fluctuated and declined from around "6.75" to below the "7" level on May 17th, and has continued to decline recently. After a short-term appreciation last week, the renminbi has returned to a downward trend against the US dollar this week.

On June 21st, the offshore RMB/USD exchange rate, which reflects international investors' expectations, briefly fell below the 7.20 mark in the intraday trading, marking the first time since the end of November last year. The spot exchange rate of the Chinese yuan against the US dollar also fell, with a drop of over 200 points after opening on June 21st, reaching a low of 7.1987.

In addition, the central parity rate of the Chinese yuan has also been depreciated for two consecutive days. On June 21st, the central parity rate of the Chinese yuan against the US dollar was lowered by 199 basis points to 7.1795. The previous trading day's median price was 7.1596, with a 395 basis point decrease on the same day.

Since the beginning of this year, the exchange rate of the Chinese yuan against the US dollar has fallen by nearly 3.5% in the onshore and 4% in the offshore markets, respectively.

Will the RMB exchange rate continue to decline in the second half of the year? In fact, from the two major characteristics of "elasticity" and "resilience", the RMB exchange rate does not have the conditions for a trend downward.

In recent years, the exchange rate of the Chinese yuan against the US dollar has repeatedly broken the "7" mark and quickly regained its "7" mark in the short term, significantly enhancing its elasticity. In April of this year, the Governor of the People's Bank of China, Yi Gang, stated that in the past five years, the exchange rate of the RMB against the US dollar has "broken 7" three times. The first time was in August 2019, the second time was in February 2020, and the third time was in September last year. The first two times it took 5 months to return to below the "7" level, and last year it took 3 months.

Moreover, China's foreign exchange market has resumed stable operation after experiencing periodic fluctuations caused by external shocks. Since 2017, in the face of three rounds of shocks such as economic and trade frictions between China and the United States, global spread of the epidemic, and unconventional monetary policy adjustments by the Federal Reserve, exchange rates have fluctuated in both directions and become more resilient. The role of market-oriented regulation has been played more effectively, and experience in macro prudential management has also been enriched.

From the perspective of resilience, the RMB exchange rate maintains relative price stability while enhancing elasticity, playing a price role in regulating the balance of international payments and providing overall and orderly exchange rate conditions for foreign trade and investment.

Currently, although the exchange rate of the RMB against the US dollar has gradually declined, the performance of the RMB is relatively stable compared to major global currencies. Data shows that in May, the exchange rate of the Chinese yuan against the US dollar fell by about 2.2%, but it was smaller than the depreciation of the euro against the US dollar (about 2.7%) and the depreciation of the Japanese yen against the US dollar (about 3.2%). From 2018 to 2023, the exchange rate of the Chinese yuan against the US dollar decreased by about 10%, but the CFETS RMB exchange rate index actually appreciated by about 3%, maintaining basic stability within 5 years.

"The current economic expectations, the U.S. Dollar Index and other internal and external factors have begun to change positively, which will help the RMB exchange rate get rid of its previous weakness. However, negative factors such as the inverted interest rate gap between China and the United States, and seasonal foreign exchange purchases still exist. Therefore, we expect that the RMB exchange rate may experience a period of low stability and bottoming out in the future." CICC pointed out in its research paper.

However, fluctuations in exchange rates are normal. After short-term external disturbances, the trend of the RMB exchange rate will eventually return to economic fundamentals.

The economic recovery is a gradual process. In recent days, the central bank has exceeded expectations by "lowering interest rates" and releasing strong signals of countercyclical regulation. The National Development and Reform Commission and other four departments have focused on proposing 22 tasks in 8 aspects to reduce costs in the real economy. The Ministry of Commerce will promote the introduction of a series of policy measures to support the recovery and expansion of consumption... The combination of economic stabilization measures is continuously working, and the foundation of domestic economic recovery is expected to continue to be consolidated.

In this context, the RMB exchange rate will not exhibit a linear unilateral trend, but rather a two-way fluctuation and steady upward trend. Experts believe that under the more active and powerful promotion of macroeconomic policies, positive factors will further accumulate, forming strong support for the RMB exchange rate this year. The RMB exchange rate does not have the conditions for a downward trend, on the contrary, there are a series of supporting factors, and there is still a possibility of appreciation within the year, "said Lian Ping, Chief Economist and Research Institute President of Zhixin Investment.

Pan Gongsheng, Vice President of the People's Bank of China and Director of the State Administration of Foreign Exchange, said recently that looking ahead, China's economic operation has generally maintained a steady upward trend, while some market institutions predict that the US economy may face a mild recession. Meanwhile, as the Federal Reserve's interest rate hike cycle approaches its end, it is difficult for the US dollar to sustain its strength, and the spillover impact is expected to weaken. Overall, China's foreign exchange market is expected to maintain a relatively stable operating state.