Abstract It is suggested that the monetary authorities fully release the price adjustment effect of the exchange rate by enhancing the transparency and flexibility of the RMB exchange rate pricing, so that the exchange rate will provide more assistance for the stable development and transformation and upgrading of the Chinese economy. Since the beginning of 2017, the RMB exchange rate against the US dollar has continued to depreciate...
It is recommended that the monetary authorities fully release the price adjustment effect of the exchange rate by enhancing the transparency and flexibility of the RMB exchange rate pricing, so that the exchange rate will provide more assistance for the stable development and transformation and upgrading of the Chinese economy. Since the beginning of 2017, the exchange rate of the RMB against the US dollar has changed from the previous trend of depreciation, and it has begun to maintain stability and enter a narrow range of shocks. On May 26, 2017, the central bank once again reformed the pricing mechanism of the central parity of the RMB exchange rate, and introduced the “counter-cyclic factor†in the pricing formula. The purpose was to “moderately hedge the procyclical fluctuations in market sentiment and ease the possible “flocks†in the foreign exchange market. After that, the trend of rapid appreciation of the RMB against the US dollar climbed from 6.88 at the beginning of the year to 6.46. It was not until September 11 that it began to pull back, ending the 11-liter situation.
This phenomenon has caused widespread discussion in the market and industry. Some people believe that the renminbi has entered the new round of appreciation channels with the beginning of the new economic cycle. We believe that the stable and rapid appreciation of the RMB from the beginning of 2017 to the present is mainly affected by the weak dollar, the strong domestic economy and the reform of the middle price system. But it is still too early to say whether it will enter a new round of appreciation channels. What the market and the government should abandon most is the one-way thinking of the renminbi's "non-rising and immediate". The market-oriented mechanism for the formation of the RMB exchange rate is far more worthy of attention than the exchange rate level itself.
To understand the current exchange rate appreciation of the RMB against the US dollar, at least it should be traced back to the “8·11†exchange rate reform in 2015. Since the “8·11†exchange reform in 2015, the RMB exchange rate against the US dollar can be divided into at least three stages. The first phase was the exchange rate reform from “8.11†to the end of 2016. At this stage, the overall RMB exchange rate showed a trend depreciation, from the level of 6.22 before the exchange reform to 6.95. The second stage is from the end of 2016 to May 2017. At this stage, the exchange rate of the RMB against the US dollar remained stable overall, and remained at a level of around 6.88. The third stage is from May 2017 to the present, the RMB exchange rate against the US dollar has appreciated rapidly, rising from 6.88 to 6.46.
After the "8·11" exchange rate reform, the exchange rate of the RMB against the US dollar continued to depreciate. There are fundamental factors in it, as well as factors affecting market pessimism. On the one hand, the domestic economy has not recovered, the PMI has been hovering around 50, and the PPI has maintained a year-on-year negative growth for nearly 50 consecutive months. This situation did not begin to improve until the fourth quarter of 2016. On the other hand, in the early days of the “8.11†exchange rate reform, the RMB exchange rate fluctuated sharply in the short term, and the market panicked. Many institutions had large losses in their trading positions. The strong appreciation of the renminbi seems to be reversed overnight as a sharp depreciation. Subsequently, the central bank stepped in and used the huge foreign exchange reserves to intervene in the exchange rate market. However, the phenomenon of continuous exchange rate depreciation and continuous capital outflows has not been fundamentally reversed. At the end of 2015, the central bank once again reformed the RMB exchange rate middle price system and introduced a basket of currency indices in an attempt to stabilize market expectations. However, the new median price mechanism has still not changed the trend of continued RMB depreciation. In the case that the domestic fundamentals are weak and the US dollar continues to strengthen, the RMB exchange rate can only be devalued.
Until the beginning of 2017, the RMB exchange rate against the US dollar showed new characteristics. First, the exchange rate of the RMB against the US dollar ended its previous devaluation for more than a year, and it began to remain stable and fluctuated within a narrow range of 6.88. Second, in the 94 trading days before May 25, 2017, the median price of 70 trading days was lower than the spot exchange rate, and the median price of only 24 trading days was higher than the spot exchange rate, indicating that the RMB exchange rate against the US dollar was There was still a small depreciation pressure during this time. Third, the exchange rate of the RMB against the US dollar is significantly decoupled from the performance of the US dollar index at this stage, and there is also a significant difference from the effective exchange rate of the RMB.
It should be said that the improvement of domestic fundamental factors since the beginning of 2017 is an important reason for the RMB exchange rate against the US dollar. Regardless of whether the new cycle has arrived, a number of indicators since the end of 2016 indicate that the Chinese economy has indeed recovered, which is the most important support for the RMB exchange rate. While advancing the de-leveraging of the financial sector, the continuous increase in domestic interest rates has led to a renewed spread between China and the United States, and has also played a supporting role in the stability of the RMB exchange rate. At the same time, the US dollar has gradually weakened since the beginning of 2017 and has become a key factor supporting the stabilization of the RMB exchange rate.
However, the stabilization of the RMB exchange rate in the first five months of 2017 itself has caused some doubts. The most critical issue is that the relationship between the RMB exchange rate and the degree of China's fundamental recovery, the change in Sino-US spreads and the weakening of the US dollar index is extremely disproportionate.
First, the Chinese economy showed a strong recovery in the first five months of 2017, with a significant increase from PMI to PPI to industrial added value. For the time being, the specific reasons for the economic recovery are not mentioned. This strong economic performance has not been reflected in the exchange rate, which itself is puzzling.
Secondly, domestic financial deleverage continues to raise domestic interest rates. The spread between China and the United States has expanded from the lowest 1.77% to 2.45%, an increase of 68 basis points. However, the RMB exchange rate has only remained stable, and there is still a slight depreciation pressure.
Finally, the US dollar index began to weaken at the beginning of 2017, depreciating 5.6% in five months. In the first five months of 2017, the currencies of major developed countries and emerging economies showed a corresponding appreciation of the dollar. Among them, the exchange rate of the euro, the Japanese yen, the British pound and the Australian dollar against the US dollar rose by 6.91%, 5.58%, 4.46% and 3.08% respectively. The emerging market currencies such as the Russian ruble, the Indian rupee, the Mexican peso and the South African rand also appreciated 8.31% respectively. , 5.29%, 11.32%, and 4.74%. In the same period, the central parity of the RMB against the US dollar only rose by 1.07%, which is not in line with changes in China's economic fundamentals and changes in the international currency market.
It is against this background that the central bank decided to reform the central parity pricing mechanism of the RMB exchange rate again, and by introducing a countercyclical adjustment factor to hedge the irrational factors in the foreign exchange market, prompting the RMB exchange rate to reflect changes in fundamentals at home and abroad.
The effect of the central bank introducing a countercyclical factor is immediate. Since the introduction of the countercyclical factor on May 26, 2017, the spot exchange rate of the RMB against the US dollar has risen from 6.88 to 6.46, and the appreciation has exceeded 6% in three months. From a fundamental point of view, there has not been a significant change since May 2017; from the perspective of China-US interest rate differential, it has narrowed since May; from the perspective of the effective exchange rate of the RMB, it has remained basically stable since May. grow rapidly. Since May 2017, the US dollar index has started to fall rapidly, falling from 97.5 to 91.3, a drop of more than 6%. That is to say, the introduction of the counter-cyclic factor allows the RMB exchange rate against the US dollar to fully reflect the weakness of the US dollar, and thereby complete the repair of market confidence.
However, there is a certain concern about the “appreciation that is consistent with the fundamental situation†achieved by the countercyclical factor. On the one hand, the current situation may be artificially overshoot, causing exchange rate pricing to be distorted again. In the 94 trading days of the first five months of 2017, there were 65 trading days in which the central parity of the RMB against the US dollar was higher than that of the offshore RMB in Hong Kong. This indicates that the RMB is actually under pressure to appreciate most of the time. The exchange rate system on the shore has not been reflected. After the introduction of the counter-cyclic factor on May 26, 2017, the 44-day trading day of the 74 trading days has been lower than the offshore spot exchange rate, reflecting the depreciation pressure of the RMB against the US dollar.
On the other hand, the introduction of the countercyclical factor essentially restores the central bank's intervention power over the exchange rate, and exchange rate pricing is more inflexible. The market chose to travel with the central bank because it recognized the credibility and capabilities of the central bank. In a situation where the economic situation is relatively good, the situation of rising and rising is in line with the policy needs and the fundamentals, and is also easily accepted by the market. However, once the situation reverses, whether the reversal comes from the domestic economic downturn or the international situation reverses, the target between the multiple subjects will deviate, and the renminbi will face a new test. At this time, the central bank either bears the pressure of depreciation, uses the countercyclical factor as a tool, and returns to the old way of managing the exchange rate with opaque rules; or adopts a flexible exchange rate mechanism to release the pressure of depreciation, but it cannot control the depreciation.
Since the beginning of 2017, in the face of the fact that the RMB exchange rate cannot reflect the fundamentals, the central bank has taken measures to make the exchange rate reflect the actual situation, and the necessity and correctness are beyond doubt. But the counter-cyclical factor is only a matter of expediency, and it has taken another step on the road to a more flexible exchange rate formation mechanism. The “8·11†exchange reform has added the closing price to the mid-price pricing process, which is the most crucial step. Subsequent additions to a basket of currency prices and countercyclical factors all weaken the effect of the closing price on the mid-price. In the long run, what pricing mechanism the RMB exchange rate will go towards is far more important than the RMB exchange rate itself. Compared with the countercyclical factor, the "anchor" of the RMB exchange rate should be placed on the fundamentals of the Chinese economy. Even if the Chinese economy may experience downward pressure in the short term, the long-term fundamentals of the Chinese economy are still good, and industrial upgrading and institutional reforms are still continuing. It is recommended that the monetary authorities fully release the price adjustment effect of the exchange rate by enhancing the transparency and flexibility of the RMB exchange rate pricing, so that the exchange rate will provide more assistance for the stable development and transformation and upgrading of the Chinese economy.
(This article has been published in the 21st Century Business Herald)
(The author of this article: Chief Economist, Chongyang Financial Research Institute, Renmin University of China)
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