Guan Tao: The current round of RMB exchange rate rebound is driven by the market, not deliberately guided by relevant parties

Guan Tao is the global chief economist of Bank of China Securities and a director of the China Chief Economist Forum, and the 2024 Tsinghua PBC Chief Economist Forum was held in Beijing on September 28. Guan Tao, Global Chief Economist of Bank of China Securities, attended and delivered a speech. The following is a transcript of the speech: Thank you, Dean Tian. I am studying the RMB exchange rate, and the RMB exchange rate has been relatively hot recently, so I would like to make three points on the Fed's interest rate cut and the RMB exchange rate. First, this wave of RMB exchange rate rebound is market-driven. Why am I talking about this? Many people say, why is the renminbi still appreciating in such a state of China's economy? Why don't the parties concerned take some measures to stop the renminbi from appreciating? Especially before the financial support package came out on September 24. So, I want to say that this wave of RMB rebound is not deliberately guided by the relevant parties. We have seen that since July 25, the RMB exchange rate has oscillated higher, and so far, both the central parity and the onshore and offshore RMB exchange rate trading prices have recovered all the losses of the year, and they have all risen to around 7.0. And by yesterday, the overseas RMB exchange rate had officially broken through 7, and the domestic RMB exchange rate was still around 7.01. So, why is the renminbi's appreciation market-driven? We can see that after the appreciation of the RMB on July 25, for a long time, the trend of the central price of the RMB was still consolidating at a low level. The market regards the central parity of the RMB as an important observation window for the central bank's exchange rate policy signals. However, in fact, by August 13, the central parity of the renminbi hit a new low this year, that is, it began to rebound on July 25, and the central parity of the renminbi hit a new low. Moreover, the RMB exchange rate index also depreciated relative to the previous period in the process of this wave of rebound. In other words, non-US currencies generally appreciate against the US dollar, but the appreciation of the RMB against the US dollar generally lags behind the overall appreciation of other non-US currencies. So, this wave of appreciation is the market pushing it. Another interesting piece is that before the policy package came out on September 24, there was actually a lot of discussion and a lot of opinions on the Chinese economy. However, this rally in the renminbi actually began just before September 24. Moreover, the onshore RMB trading price has continued to rise above seven yuan since September 13, not because everyone has seen an increase in macroeconomic control after September 24, and everyone's expectations have improved. This means that the renminbi's appreciation is now fully priced in for China's economic expectations before September 24. That's the first point. Second, don't talk about the new cycle, but adapt to the new normal. Now some people are starting to think about it, that is, has the renminbi entered a new cycle of appreciation? Just like after the renminbi rose in 2020, many people talked about a new cycle. Why not talk about the new cycle? We need to understand that the reasons for this wave of RMB appreciation are actually twofold. At the beginning, it was the recovery of external factors, because the Fed's easing expectations, coupled with the weakening of the dollar, and the sharp rebound of the yen, and then led to the appreciation of the yuan, that is, some of the RMB carry trades were reversed. Will the renminbi continue to appreciate? It depends on the changes in the external environment. In addition, after September 24, due to the introduction of a new round of financial support plans in China, the Politburo meeting of the Central Committee on September 26 announced that it would increase fiscal and monetary policy support. Therefore, there is also a lot of hope for incremental fiscal policy. Well, these expectations are reflected in the forex market. Of course, the forex market is still a drop in the bucket compared to the stock market. Like in his speech, the stock market that Dean Tian said was down. Over the past week, the Shanghai Composite Index has risen more than 10%. Therefore, whether the renminbi will continue to rise depends on the sustainability of these two factors. Here, we say the other way around. Regarding the improvement of the domestic economy, I think it will depend on the implementation of our incremental monetary policy, as well as the follow-up of incremental fiscal policy. Then the question is, can these two policies form a synergy for stable growth? Judging from the current situation, our policies are more aimed at achieving the annual economic growth target set at the beginning of the year, which is a growth target of about 5%. The next question is, will a growth of about 5% lead to a unilateral appreciation of the renminbi? If we can achieve a growth rate of about 5%, it will definitely have stronger support for the RMB than in the previous period, but can we make the RMB appreciate unilaterally? In fact, we can look at the experience of the Asian financial crisis. In 1998 and 1999, when China's economic growth rate did not achieve the target of 8%, it was the time when the pressure on the depreciation of the renminbi was the greatest. After 2000, our economic growth rate recovered to more than 8%, but in fact, in 2000, the renminbi continued to be under pressure. It was not until the 2001 United States recession, the Fed cut interest rates sharply, and the dollar trended weaker, and then we repatriated capital and the RMB faced upward pressure. However, that appreciation was not realized until 2005 after the exchange rate reform of "7.21 (July 21, 2005)". The previous upward pressure was mainly manifested in the repatriation of capital and the accelerated accumulation of foreign exchange reserves. Therefore, it is necessary to look not only at the performance of China's economy, but also at the United States economy and the monetary policy of the Federal Reserve. Although the Fed launched its first interest rate cut in September this year, the first rate cut was 50 basis points, Powell also told everyone not to think of this 50 basis points as the new normal. He said that in the future, the Fed may either accelerate or slow down rate cuts, and it is also possible that interest rate cuts will be paused. In fact, this corresponds to a soft landing for the United States economy and the risk of secondary inflation (no landing) for the United States economy. I personally believe that after the start of this round of interest rate cut cycle, the United States economy will have three scenarios, which may be a soft landing, a hard landing, or no landing. In the case of a soft landing, the Fed cuts rates gradually, intermittently, with small cuts. However, in the absence of a landing, it is possible that the Fed will pause its rate cuts, and it is even possible that it will resume raising interest rates, as Greenspan did in the mid-90s. Then, in the case of the resumption of interest rate hikes, the dollar is likely to regain strength, and the yuan will continue to be under pressure. Only in the event of a hard landing is the Fed likely to cut interest rates aggressively, and when risk aversion fades, the dollar is likely to trend weaker. So, in that sense, there is a lot of uncertainty both internally and externally. Therefore, I personally think that the RMB exchange rate has shifted more from unilateral to two-way fluctuations in the past. Third, I would like to talk about countermeasures. Let's talk about two: The first point is from the government's point of view. As we just said, in fact, there is great uncertainty about the Fed's monetary policy path and the economic outlook for United States. Whatever the case, there are pros and cons for China. In the past, we often talked about the increasing complexity, severity and uncertainty of the current external environment, and the Politburo meeting at the end of July even talked about the increase in the adverse effects brought about by the changes in the current external environment. So, in response to changes in the external environment, I think the plan should be more important than the prediction. We expect to guess that the United States economy is a soft landing, and how the United States cuts interest rates is better than to consider what we should do under what circumstances, and to prepare the policy in advance. What is a response plan? That is, we do scenario analysis in advance, set different situations, and different situations have some thresholds, and once the thresholds are triggered, our policies can be launched in a timely manner to improve our policy response capabilities. It's not that when it happens, we'll look at what happened. At that time, the research may be to make some marginal adjustments on the basis of the plan. Probably something new that was not taken into account at the time, this is the first point. The second point is that for enterprises, in the face of such internal and external uncertainties and instability factors, the two-way fluctuation of the RMB exchange rate is the new normal, and enterprises should further strengthen the awareness of risk neutrality and control currency mismatch and exchange rate exposure. A few years ago, when the United States had zero interest rates and unlimited easing, everyone was talking about cheap funds abroad. As a result, I didn't expect high inflation to suddenly return, and the Fed raised interest rates aggressively. Now everyone knows, is there cheap money abroad? Many overseas dollar bonds have been miserable. It's the same now. Now everyone is keen that the renminbi is a low-interest currency, and they are reluctant to sell the dollar, so they do interest rate carry trades to take advantage of the high interest rate differential of the dollar and the appreciation of the exchange rate difference. However, if the RMB exchange rate fluctuates in the short term, it may not necessarily be your ideal price when you settle the foreign exchange. Therefore, in this sense, enterprises are not professional in finance, so they should do what they are familiar with based on their main business, and then use appropriate tools to lock in the risk of exchange rate fluctuations. That's all I have to say, thank you!