CNY exchange rate approaching 7 yuan era, will break "7"?

The exchange rate of CNY against the US dollar is approaching the era of 7 yuan. Whether the CNY will "break 7" raises concerns.

Authorized by the People's Bank of China, the China Foreign Exchange Trade System announced that the central parity rate of CNY in the interbank foreign exchange market on September 7, 2022 was 6.9160 yuan per US dollar, down 64 basis points from the previous trading day.

In addition, the onshore CNY to the dollar exchange rate fell below the 6.97 yuan mark, the offshore CNY to the dollar exchange rate fell below the 6.99 yuan mark, close to the "breaking 7".

Why is the CNY depreciating?

The decline of the CNY exchange rate has been influenced by a variety of factors, most recently related to the increased monetary policy adjustment in the US.

Data show that the US dollar has appreciated by 14.6% this year. Against the background of the US dollar's appreciation, other reserve currencies in the SDR basket have depreciated significantly against the US dollar. From January to August, the euro depreciated by 12%, the British pound by 14%, the Japanese Yen by 17%, and the CNY by 8%.

Wang Youxin, a senior researcher at the Research Institute of the Bank of China, said that influenced by factors such as the US Federal Reserve will continue to raise interest rates and the weak euro, the external US dollar index continues to rise, putting adjustment pressure on the CNY exchange rate.

But compared with other non-dollar currencies, the yuan's depreciation has been minimal. Liu Guoqiang, deputy governor of the People's Bank of China, said at a regular policy briefing of The State Council on Friday that the depreciation of the CNY is relatively small, and in the SDR basket, it should be said that the CNY has appreciated against all non-US dollar currencies except the US dollar, rather than against other currencies in the SDR basket. In the SDR basket, a base case is that the dollar has appreciated and the CNY has appreciated, but the dollar has appreciated a bit more than the renminbi has appreciated. So there has not been a full depreciation of the RMB.

What is the impact of the CNY devaluation?

Generally speaking, after the depreciation of CNY, the cost of studying abroad and shopping will increase, and the import will be under pressure, but it is profitable for the export.

China's imports and exports totaled 27.3 trillion yuan in the first eight months of this year, up 10.1 % from the same period last year, data from the General Administration of Customs (GAC) showed Monday. Among them, exports reached 15.48 trillion yuan, up 14.2%; Imports were 11.82 trillion yuan, up 5.2%.

Bai Ming, deputy director of the International Market Research Institute under the Ministry of Commerce, told Sino-Singapore Finance and Economics that the depreciation of the local currency helps exporters increase their export income and improve their competitiveness and profitability. But a weaker CNY is also a double-edged sword. Exporters have benefited from the depreciation of the yuan, but if they use too many imported raw materials and components, they are likely to spend more because of the depreciation of the yuan.

Wen Bin, chief economist of China Minsheng Bank, told Singapore Finance and Economics that China's import and export enterprises should not bet on the yuan's rise or fall. Instead, they should manage exchange rate risks to ensure normal production and operation.

Will the CNY break 7?

The prevailing concern about the future direction of the CNY is whether it will fall below the round number of seven.

Citic Construction investment pointed out that under the background of the obvious enhancement of the linkage between the RMB and the US dollar, the analysis of the future trend of the CNY exchange rate depends more on the US dollar index. Therefore, there is pressure for CNY to depreciate and even "break 7", but the impact of this round of depreciation on capital flow is not strong, and the expectation will not be significantly weakened.

Ping An Securities chief economist Zhong Zhengsheng believes that this round of CNY exchange rate has the possibility of "breaking 7". Relative to the dollar, the CNY is still significantly stronger at its current level. But the point of the CNY exchange rate itself is not the most important. It is the stability of China's cross-border capital flow that is the essence of the problem. After two rounds of "breaking 7" and then recovering in August 2019 and early 2020, the level of 7 itself is not likely to cause a so-called overshoot.

Liu Guoqiang, deputy governor of the People's Bank of China, said the long-term trend of the yuan should be clear and the world's recognition of the CNY will continue to increase in the future, which is a long-term trend. However, in the short term, it should be like this. Two-way volatility is a normal situation. With two-way volatility, there will be no "unilateral market", but the point of the exchange rate is uncertain. A reasonable, balanced and basically stable economy is what we like to see, and we have the strength to support it. I don't think there will be any accidents, nor will there be any accidents.

How to treat the CNY if it breaks “7”?

In fact, since the “811” exchange rate reform in 2015, the CNY exchange rate has "broken 7" in 2019 and 2020.

On August 5, 2019, an official of the People's Bank of China said in response to the "7" level of the RMB exchange rate, the "7" is not an age, the past can not be returned, nor is it a dyke, once the flood water is breached, it will be a thousand miles. "7" is more like the water level of a reservoir, which is higher in the wet season and will fall again in the dry season, with rises and falls, which are normal.

Guan Tao, global chief economist of Bank of China Securities, believes that the broad volatility of the CNY exchange rate should be viewed with a calm mind. Now, both the government and the market have greatly enhanced their tolerance and adaptability to two-way volatility and wide volatility of the exchange rate.

The central bank will cut the reserve requirement ratio for financial institutions by two percentage points, from the current 8 % to 6 %, effective Sept. 15. This is the second time this year that the reserve requirement ratio has been cut. Experts believe that the central bank's move to send a positive signal to the market is conducive to stabilizing CNY exchange rate expectations and avoiding irrational overshooting.

Source: China News Network