It costs $80,000 less to exchange $100,000, and the RMB will continue to rise in the future?

Since May 27, the onshore and offshore RMB/USD exchange rates both rose above the 6.4 mark, the RMB officially entered the “6.3 era”.

  On May 28, the RMB exchange rate continued its strong trend. On the same day, the offshore RMB rose above the 6.36 mark against the USD, at 6.3598, a new high since May 2018; the onshore RMB rose above 6.37 against the USD, up to 6.3619, a new high since May 2018.

  Since May last year, the RMB exchange rate has come out of a clear appreciation trend, with the offshore RMB exchange rate rising to 6.3598 from a low of 7.1766 on May 27 last year, a cumulative rise of 8,168 basis points. Even though the RMB has achieved such a rise, the hedge market expects that the RMB exchange rate may still have room for appreciation in the future.

  In the trend of RMB appreciation, the signs of foreign capital inflow into the stock market are obvious.

  This week, the net inflow of northbound funds reached 46.813 billion yuan, a new high for a single week since the opening of the Shanghai-Shenzhen Stock Exchange, and at the same time, A-shares also accelerated the rise, and the Shanghai Stock Exchange Index has broken through the 3600-point barrier position.

  In addition, the appreciation of RMB will have an impact on many aspects of the national economy.

  From the perspective of import and export, RMB appreciation may ease the pressure of rising commodity prices and thus reduce the cost of importing enterprises.

  For ordinary residents, it will mean an increase in the purchasing power of the RMB overseas. Based on the exchange rate of the yuan to the U.S. dollar on May 28 last year, it would cost 717,000 yuan to exchange US$100,000, but now it only costs 637,000 yuan, a full 80,000 yuan less.

Appreciation to cope with imported inflation?

  After the “8-11 exchange rate reform” in 2015, the RMB exchange rate formation mechanism has gradually become market-oriented, and its long-term trend is strongly correlated with the USD index. Historically, an upward movement in the dollar index corresponds to a decline in the yuan-dollar exchange rate, and vice versa.

  ”A weaker dollar is an important driving factor for the recent appreciation of the RMB against the USD.” Shao Xiang, a researcher at Dongwu Securities, told the Times on May 27.

  The Times reporter noted that since May last year, the U.S. dollar index has continued to move downward, falling from a high of about 100 points to about 90 points today, a drop of nearly 10 percent. The weakening of the U.S. dollar has become the main driving force behind the current round of RMB appreciation, and the direct cause of the weakening of the dollar is related to the Federal Reserve’s monetary “watering down”.

  ”Since the second half of 2020, the RMB has appreciated significantly while the dollar index has continued to depreciate as a direct result of the extremely loose monetary releases taken by Western countries after the epidemic, with the U.S. M2 growing at a record high of over 20% year-on-year, while China’s M2 grew at only about 10% year-on-year during the same period.” Yan Xiang, an analyst at Guoxin Securities, said in its research report.

  Shao Xiang believes that recent central bank comments on appreciation to ease imported inflation have also heated up expectations for RMB appreciation.

  Since the second half of 2020, international commodity prices denominated in U.S. dollars have generally risen sharply due to the weakening of the U.S. dollar, leading to an expansion of China’s PPI, which has put pressure on Chinese inflation. National Bureau of Statistics data show that in April, the national industrial producer ex-factory prices rose 6.8% year-on-year, up 0.9% YoY; industrial producer purchase prices rose 9.0% YoY, up 1.3% YoY. January-April average, industrial producer ex-factory prices rose 3.3% over the same period last year, industrial producer purchase prices rose 4.3%.

  Among them, the price of production materials rose 9.1%, an increase of 3.3 percentage points over the previous month, affecting the total level of industrial producer ex-factory prices rose about 6.76 percentage points. Extractive industry prices rose 24.9%, raw material industry prices rose 15.2%, processing industry prices rose 5.4%. Industrial producers purchase prices, non-ferrous metal materials and wire prices rose 23.3%, ferrous metal materials prices rose 20.2%, chemical raw materials prices rose 13.3%, fuel and power prices rose 12.1%.

  In the context of soaring international commodity prices and domestic inflationary pressure, the appreciation of the RMB to combat “imported inflation” is gaining momentum. The rationale is that the continued appreciation of the RMB will reduce the cost pressure on importers and thus weaken the imported inflationary pressure caused by rising commodity prices.

  A statement made by Zhou Chengjun, director of the Central Bank’s Institute of Finance, at a meeting in Moganshan in April this year has started the market’s reverie. Zhou Chengjun said that the central bank would eventually have to abandon its exchange rate target and that the RMB would continue to appreciate against the US dollar in the medium to long term.

  On May 21, Lv Jinzhong, director of the investigation and research department at the central bank’s Shanghai headquarters, wrote an article in China Finance, explicitly suggesting that exchange rate flexibility should be enhanced and the RMB should appreciate appropriately to counteract input-based effects. The remarks strengthened expectations of RMB appreciation again.

  However, two days later, Liu Guoqiang, deputy governor of the central bank, responded to the market’s concerns about the RMB exchange rate with a question-and-answer session.

  Liu Guoqiang pointed out that the central bank will focus on expectation guidance, play the role of exchange rate regulation macroeconomic and international balance of payments automatic stabilizer, and maintain the basic stability of the RMB exchange rate at a reasonable equilibrium level. The central bank has improved the managed floating exchange rate system based on market supply and demand, adjusted by reference to a basket of currencies, and this system is a suitable exchange rate system arrangement for China at present and for a period of time in the future.

  Liu’s response was seen by the market as cooling expectations for the appreciation of the yuan, indicating that the central bank would not respond to inflation by intervening in the exchange rate.

  However, the RMB has remained strong since this week, with the exchange rate against the USD hitting nearly three-year highs one after another.

How much room is there for the yuan to appreciate?

  The market believes there is still room for the RMB to move upward. “The RMB exchange rate market is more inertial and can still rise, and 6.30 is an important support.” Shao Xiang told the Times.

  ”Analyzed from the perspective of foreign trade, considering the recurrence of epidemics in other parts of the world and the repair of domestic demand in the U.S., China’s exports to the U.S. will remain strong in the short term, and the trade surplus may continue to be high, pulling the RMB to continue to appreciate.” CITIC Securities Ming Ming bond research team said in a research note.

  In addition, Ming’s bond team pointed out that the continued U.S. trade deficit will also provide support for the yuan from a dollar depreciation perspective. “Analyzed from the perspective of U.S. bonds, the current U.S. economic repair slowdown has led to a downward trend in real interest rates, iterated with the Fed’s dovish attitude, the possibility of the Fed tightening monetary policy in the short term is low. The combined effect of the two factors, we believe that the RMB still has room for appreciation.”

  Shao Xiang said that the warming of market risk sentiment, iterated with the possibility that the second quarter results of some domestic industries may continue to exceed expectations, as well as the inflow of foreign capital will further boost the appreciation of the RMB.

  Qin Tai, a macro analyst at Shenwan Hongyuan, expects that the yuan can still continue its active appreciation since last year under the benchmark expectation during the year. “But the process may be accompanied by ups and downs in domestic consumption and investment expectations, and it will not be smooth sailing.” Qintai said in its research note.

  The market is currently divided on the appreciation space of the yuan. Mingming’s bond research team said in its research report that the USD/CNY exchange rate may touch 6.2 downward, while Shenwan Hongyuan’s Qintai team expects the RMB/USD exchange rate to rise to around 6.3-6.4 by the end of the year.

  Market expectations are more consistent then the relatively limited space for the appreciation of the yuan. “I think this is unsustainable unless the epidemic overseas continues to worsen and Chinese exports are completely unaffected.” Shao Xiang said.

  CICC Macro’s Zhang Jundong and Zhou Peng expressed similar views in their research reports. According to Zhang Jundong and others, as the global recovery deepens, foreign production capacity recovers and import prices rise, the current account surplus is expected to be lower than in 2020, growth momentum may slow down, structural problems of imperfect and uneven recovery may fester, the economy may face adjustment pressure, and the space for further appreciation of the RMB may be limited.

Good for the stock market, bad for exports?

  Since the epidemic, the Federal Reserve has implemented a long-term loose monetary policy. Data show that so far last year, the U.S. dollar has depreciated against all major currencies, including the euro, yen, pound and yuan, in contrast to the appreciation of the yuan.

  The China Foreign Exchange Trade Center’s CFETS RMB exchange rate index has risen from a post-May 2020 low of 91.42 to the current 97.19, an appreciation of more than 6%. Moreover, in the long term, the RMB has a tendency to rise further against the USD.

  The appreciation of the RMB exchange rate has triggered market concerns that the appreciation of the RMB has weakened the price competitiveness of export products, especially for the downstream labor-intensive industries that are weakly driven by foreign demand in this round, the appreciation of the local currency will compress the profitability of related enterprises to a certain extent.

  Guoxin Securities does not strongly agree with this view. “In fact, the impact is not so big, in most cases the exchange rate is the fruit of export is the cause, good export exchange rate will only appreciate, if China’s exports can not, the RMB exchange rate is unlikely to continue to appreciate.” Guoxin Securities said in a research report.

  CITIC Securities Ming research team said, in the short term, the repeated iterations of the overseas epidemic plus the repair of foreign demand in Europe and the United States, the global supply capacity repair setback will continue to pull China’s exports, or offset part of the impact of currency appreciation; in the long term, China’s trade structure is also constantly adjusting, the dependence of exports on labor-intensive products declined, so the impact of RMB appreciation on exports has also weakened.

  The benefit of RMB appreciation to Chinese companies’ imports is obvious. “At present, the growth of China’s import amount is mainly driven by the rise of overseas commodity prices. The cost pressure faced by import enterprises under the continuous appreciation of the RMB and the input inflation caused by the rise of commodity prices may have weakened.” CITIC Securities said in an article in its WeChat public number.

  On the other hand, the impact of RMB appreciation has spread to the secondary market. Generally speaking, RMB appreciation constitutes a positive effect on the domestic stock market in general, one is through exchange gains and losses that affect the business operation and financial performance of enterprises, such as those with more foreign debts, more exports and more imported raw materials, with industries such as aviation, finance, real estate, machinery and equipment, household appliances, non-ferrous metals, chemicals and textiles and garments as typical representatives.

  Renminbi appreciation will also attract foreign capital inflows. GF Securities strategic research team said in a research report that RMB exchange rate appreciation will become a push for A-shares to break out of the box oscillation.

  ”RMB appreciation in the current environment is a clear positive for the A-share market, and in the short term we continue to maintain the judgment of our medium-term strategy that the market has the opportunity for a main rising wave in the second and third quarters, with the index expected to break through the high before the February 18 adjustment.” Guoxin Securities said in a research report.