Tan Yaling: What are the problems that need to be paid attention to in RMB?

Tan Yaling is an independent economist at the China Foreign Exchange Investment Research Institute

In the first half of 2024, the onshore RMB market in mainland China showed a 2.4% depreciation of the RMB, which is in line with the cycle and logical cause and effect of RMB depreciation, but it seems to be a bit excessive compared to the long-term RMB depreciation. Therefore, the market can also see that the central price of the mainland central bank has been insisting on a reserved position of about 7.10 yuan, which is quite different from the offshore RMB exchange rate. Especially near the end of the market in the first half of this year, the depreciation of offshore RMB has challenged the important threshold of 7.30 yuan depreciation, which highlights the intention and purpose of overseas speculation and stimulating RMB depreciation. After all, as the end of the 14th Five-Year Plan in the mainland, coupled with the most difficult period of the mainland's economic cycle, structure and quality, in fact, the RMB is relatively stable, and even the appreciation at the current level will be particularly important, which is also an important national policy for the central bank to emphasize the stability of the RMB volatility at its regular quarterly meeting.

On the one hand, the depth of RMB depreciation is unfavorable to the dollar-denominated mainland economy at the end of the year, which is the strategic intention of the cycle. The results of last year's comparison with the previous year tell us that the depreciation of the renminbi is not conducive to the scale and strength of the mainland's dollar-denominated economic growth, that is, even if the economic scale measured by the renminbi is growing, the final conversion into the US dollar will reduce the mainland's economic volume is an unfavorable factor and a passive situation. In 2022, the total size of the mainland economy denominated in RMB will be 121 trillion yuan, or 18.33 trillion US dollars in US dollars at 6.6 yuan, and the total economic size of the mainland will rise to 126 trillion yuan in 2023, which will be 17.74 trillion US dollars in US dollar value at 7.1 yuan, and the mainland economy will be discounted by 590 billion US dollars. At present, the RMB exchange rate has been hovering at 7.10-7.20 yuan for 13 consecutive months, and it is expected that the depreciation of the RMB will deepen to 7.40 yuan in the future, which will be more unfavorable to the increase in the scale of the mainland economy in 2024. In particular, in the face of the current unfavorable situation in international trade, the mainland's export growth and import adjustment are facing the depreciation of the renminbi and the shortage of orders, the depreciation of the renminbi and the increase in the cost of purchasing foreign exchange, which has formed a severe and complex challenge period for the mainland's trade control. According to IMF2023 data, the mainland's share of global merchandise exports was 12.6%, compared with 14.4% in 2022 according to the previous year's WTO data. On the other hand, the key point is that the United States' share of global total merchandise exports will rise to 11.0% in 2023, compared with 8.3% in the WTO in 2022. It is expected that in 2024, the possibility of U.S. export trade exceeding the continent cannot be ignored, and the U.S. trade war will comprehensively contain the mainland, which is worth paying attention to its competitive strategy and pattern planning.

On the other hand, the trend of the renminbi is guided by offshore, and the appreciation of the US dollar is jointly stimulated, and it is facing the possibility of rapid repair. Although the depreciation of the renminbi coincides with the appreciation of the US dollar, the comparison between the two indicates that the appreciation of the renminbi is urgent or fast. Among them, the US dollar factor is the main risk of the onshore trend of the RMB in the second half of the year. After all, in the first half of the year, the US dollar appreciated by 4.95% and the RMB depreciated by 2.4%, and the comparison between the two currencies is limited. As a result, it is expected that the depreciation of the US dollar will be the focus of the US dollar market in the second half of the year, especially in the third quarter. If the dollar depreciates extremely rapidly, the appreciation of the renminbi will be extraordinary in the short term, and it is expected that the level will hit the 7 yuan mark and return to 6.98 yuan. However, according to the current market situation in a narrow range, it is difficult to imagine the possibility of this expectation, but according to the major events, turmoil and adjustment of the US factors, including the depreciation of the US dollar from the stimulus of the stock market decline, the suddenness of the political election campaign and the speculation of the US economic recession, the Fed's interest rate cut is expected to stimulate the depreciation of the US dollar is an urgent countermeasure in the United States, and it is also an active response measure corresponding to the appreciation of the US dollar in the first half of the year, and the final depreciation of the US dollar is at an important stage throughout the year. At the same time, the United States is also trying to use financial risks, turbulence, and instability to downplay and calm the political turmoil and social turmoil in the U.S. election. Therefore, with the measures of the central bank of the mainland to borrow treasury bonds, the mainland's policy to stabilize the stock market and exchange rate, expand the yield of the bond market, ensure the balance of supply and demand in the secondary treasury bond market with the mature and standardized operation of financial institutions, and improve the expectation to guide or increase the level of bond yields will be the internal countermeasures and cooperation related to the restoration of RMB appreciation. The depreciation of the external dollar and the intention of rising the yield of the internal treasury bonds, whether this operation is the technical space for RMB appreciation remains to be verified by the market, but the RMB depreciation is excessive, no matter whether the external intention is to deepen the RMB depreciation, or the mainland policy to control the RMB depreciation to the extreme, both are facing the inevitability of the short-term appreciation of the RMB. The depreciation trend of the RMB will remain unchanged throughout the year, but the fluctuation of the RMB range will reverse the narrow range in the first half of the year, and increasing the widening of the volatility of the RMB will be an opportunity to comply with the logic of the US dollar and the purpose of the RMB policy. Compared with the onshore volatility of RMB in the first half of 2023 of 5,794 points (6.6905-7.2699 yuan), the onshore volatility of the RMB in the first half of this year is 1,611 points (7.1027-7.2688 yuan).

Compared with the mainland and Hong Kong, the offshore renminbi needs more powerful mainland resources, policies and contacts to promote, and it is imperative to reverse the offshore bias, including the main influence of the US dollar and the mobilization factor of Singapore. According to the latest data from BIS, the international foreign exchange market has a daily trading volume of 8.5-9.0 trillion US dollars, and the leading force in the US currency market is 7.5 trillion US dollars per day, which is the main source of factors for the RMB to be benchmarked. Coupled with Singapore's speculation on the depreciation of the renminbi and the extreme depreciation of the yen, these are all measures that cannot be ignored in the offshore environment to deal with the depreciation of the renminbi. At present, Singapore and Hong Kong offshore are in fierce competition, and we should support and protect Hong Kong is a very important period and reality for the self, autonomy and self-control of the RMB trend, and it is also a key operational opportunity and channel. The superiority of Hong Kong's one country, two systems is the best harbor and platform for the liberalization of the renminbi and the practical, experimental and experiential nature of the Hong Kong market. The role of Hong Kong's renminbi will be a channel and platform for the mainland to hedge against risk or increase income.