Viewpoint | How do you view the continued devaluation of the RMB and its impact?

Recently, the RMB exchange rate has weakened rapidly, but compared with the currencies of other developed economies, the relative performance of the RMB is not bad.

In the short term, the US dollar index will be a key factor affecting the RMB exchange rate, and the RMB may continue to be under pressure. In the medium and long term, the US dollar index may show an inflection point after the second quarter, and with the stabilization of my country’s fundamentals, the RMB may strengthen again. In addition, the central bank has a rich policy toolbox to deal with exchange rate fluctuations. If the U.S. dollar index continues to rise, causing the RMB to continue to depreciate at an accelerated rate, it may trigger policy-level adjustments.

For the financial market, the stock market’s reaction to the depreciation of the RMB has been blunted. On the contrary, under the logic of RMB depreciation, some export-oriented manufacturing industries may usher in potential opportunities, such as textile clothing, electromechanical, automobile, light industry. Manufacturing , etc.; in the bond market, the period of the greatest pressure on foreign investment to reduce holdings has passed, and it is expected that the subsequent devaluation of the RMB will have a relatively limited impact on the outflow of foreign capital in the bond market.

▍The relative performance of the RMB is not bad.

The current round of RMB depreciation is characterized by “fast speed + large scale + widening of the off/onshore spread”. Judging from the exchange rate of the local currency against the US dollar, compared with the currency performance of other developed economies, the devaluation of the RMB this round is actually relatively mild. Since the beginning of the year, the RMB has depreciated by about 6.1% against the US dollar, which is only weaker than the Canadian dollar and the Australian dollar, and its depreciation rate is also much lower than that of the currencies of developed economies such as the euro, the pound and the yen. Looking at the exchange relationship between the RMB and other mainstream currencies, the spot exchange rates of the major currencies against the RMB have gone up and down, and there is no situation that most of the RMB currencies have weakened, which also indicates the recent weakness of the RMB to a certain extent. More because the dollar is stronger.

▍The central bank’s policy toolbox is rich, and the RMB may strengthen again after short-term pressure.

There are two main reasons for the continued devaluation of the RMB in this round: first, the epidemic in some parts of the country has caused short-term disruption to the domestic supply chain, export growth has fallen under multiple pressures, and the domestic economic fundamentals are under pressure; The transmission path of “US dollar index – a basket of currency exchange rates – the central parity rate of the RMB – the spot exchange rate of the RMB” will put pressure on the passive depreciation of the RMB.

In the follow-up, the short-term US dollar index will be a key factor affecting the RMB exchange rate, and the RMB may continue to be under pressure. In the medium and long term, as the Fed accelerates the tightening policy and the European Union and other economies gradually tighten monetary policy, the US dollar index may show an inflection point after the second quarter. With domestic fundamentals stabilizing, the expected slowdown in the depreciation of the renminbi may cause foreign trade companies that “hold the currency to wait and see” to switch to foreign exchange settlement, which may support the renminbi to strengthen again. The central bank has a rich policy toolbox in guiding foreign exchange expectations and dealing with exchange rate fluctuations, including but not limited to activating counter-cyclical factors and adjusting the foreign exchange deposit reserve ratio of financial institutions. If the U.S. dollar index continues to rise, the RMB will continue to depreciate at an accelerated pace, which may trigger policy-level adjustments.

▍What is the impact of the depreciation of the RMB on the domestic economy and financial market?

1) Macroeconomics: The impact of RMB depreciation needs to be viewed neutrally. Although depreciation may bring some pressure on capital outflows, it is also conducive to the release of export potential. As the RMB continues to depreciate, on the one hand, export companies are expected to gain exchange rates; on the other hand, the depreciation of the RMB has led to a decline in the prices of export products in the international market, and the competitiveness of enterprises in terms of product prices has improved, so that to a certain extent get more profit.

2) Stocks: In the short term, the market’s reaction to the depreciation of the RMB has been blunted. Under the logic of the devaluation of the RMB, some export-oriented manufacturing industries may usher in potential opportunities, such as textiles, electrical machinery, automobiles, and light manufacturing.

3) Bonds: The period when the most pressure on foreign capital to reduce holdings has passed, and it is expected that the pressure of the subsequent devaluation of the RMB on the outflow of funds from the bond market may also be relatively limited. The marginal improvement in the fundamentals of the domestic economy and the more structural tools in monetary policy may cause short-term fluctuations in the yield of 10-year government bonds. In the medium and long term, the resumption of work and production in China will continue to advance, and the supply chain will be gradually repaired. The credit extension is “albeit late,” and it is expected that the follow-up will be gradually opened. The superimposed pig cycle will drive domestic CPI, and the yield of 10-year treasury bond or will gradually increase.

▍Risk ​​factors:

There is uncertainty about the local epidemic situation in China; the policy strength is less than expected; the economic recovery is less than expected; the Fed tightens more than expected.

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