The RMB fell below 6.5, and the China-US interest rate gap inverted!

Recently, the RMB exchange rate against the U.S. dollar has fallen rapidly as the Fed is expected to raise interest rates. The offshore RMB has achieved four consecutive declines, falling below the integer thresholds of 6.45, 6.46, 6.47, 6.48, and 6.49 in a row, and the exchange rate has returned to the "6.5 era", which has attracted widespread market attention. On April 25, the exchange rate of the RMB against the U.S. dollar continued the downward trend of last week. The exchange rate of the offshore RMB against the U.S. dollar fell below 6.59 respectively, with a depreciation rate of over 600 basis points.

1. Short-term pressure on RMB

From the perspective of the reasons for the devaluation of the RMB, it mainly includes four aspects. First, the US dollar index hit the highest value of 101.07 in the past two years, which caused great downward pressure on the RMB exchange rate; Institutions have been bearish on currencies in the Asia-Pacific region, exacerbating the decline of the RMB;

The third is the short-term impact on China’s foreign trade caused by the epidemic, which has caused some investment institutions that were optimistic about the continuation of China’s foreign trade to reduce their long positions in RMB; fourth, the rise in global energy prices has caused Chinese importers to increase their foreign exchange purchase quotas to purchase energy products. dragged down the RMB exchange rate further.

At the same time, supply chain disturbances and the upward trend of the US dollar index may put pressure on the short-term RMB. Therefore, the People's Bank of China decided to cut the deposit reserve ratio of financial institutions by 0.25 percentage points on April 25, 2022.

Some analysts pointed out that the narrowing or even inversion of the interest rate spread caused by the divergence of economic fundamentals and monetary policies between China and the United States is difficult to quickly reverse. However, the market does not need to worry too much about the medium and long-term trend, and two-way fluctuations will remain the norm for the RMB exchange rate.

2. Overseas listed companies have obvious benefits

Under the expectation of RMB depreciation, listed companies with a high proportion of overseas exports benefited significantly. Typical companies include textile and clothing, home appliances, toys, electromechanical, furniture and other companies with a high proportion of exports.

According to statistics from Securities Times Databao, among the companies that have disclosed their 2021 annual reports, more than 1,500 companies have overseas business revenue, with a total revenue of 3.74 trillion yuan, of which more than 400 companies have overseas revenue of more than 1 billion yuan.

The overseas business income of BOE A, CMOC and Haier Zhijia exceeds 100 billion yuan. The overseas business revenue of 74 companies including China State Construction, Weichai Power, C&D Inc., and CNOOC exceeded 10 billion yuan.

In terms of the proportion of overseas business revenue to total revenue, more than 220 companies accounted for more than 50% of overseas revenue, and 32 companies accounted for more than 90%.

Tibet Everest, Walrus New Materials, and Bomaike’s overseas business revenue accounted for more than 99%, and Huali Group, Yayi Technology, and Deyi Culture and Creation accounted for more than 98%. Taking Mount Everest in Tibet as an example, the company last year was 2.049 billion yuan, of which overseas business income was 2.047 billion yuan.

3. In the second phase of the Fed's tightening impact

With the continuous devaluation of the renminbi, Guan Tao, global chief economist of BOC Securities, said that the impact of the Fed's tightening on the RMB exchange rate is currently in the second stage of four stages.

The first stage

The spillover effects of monetary tightening in advanced economies are moderate, the inflow of foreign capital to China has decreased, and the pressure on the appreciation of the RMB exchange rate has eased. Now that China has successfully passed the spillover effect caused by the first phase of tapering down its bond purchases, the renminbi is generally strong in the second half of the year.

Second stage

Greater monetary tightening in developed economies has exacerbated economic and financial shocks, China experienced periodic capital outflows, reduced trade surpluses, and two-way fluctuations in the RMB exchange rate. In view of the fact that the fiscal and monetary stimulus of the developed economies has declined this time, and geopolitical conflicts are superimposed, the probability of such a situation caused by the policy shift is not low.

The third stage

The currencies of developed economies tightened more than expected, triggering financial crises and economic recessions. Larger-scale capital outflows and trade surpluses expanded in China, and the RMB exchange rate weakened again.

Fourth stage

After the crisis, developed economies have returned to monetary easing. If China can maintain its global lead in economic recovery, it is expected to play a "safe haven" role, attract more foreign capital inflows, and make the RMB exchange rate stronger.

"In the medium and long term, under the background that my country's economic fundamentals remain stable and the international balance of payments is expected to continue double surplus, there is no basis for the RMB exchange rate to depreciate significantly." Wang Qing, chief macro analyst at Oriental Jincheng, said that considering the Sino-US currency Due to factors such as policy differences and the continued strength of the US dollar index, the RMB exchange rate may run between 6.7 and 6.8 by the end of the year.

According to the China Securities Journal, some people in the industry predict that in the medium and long term, the probability of continuous unilateral depreciation of the RMB exchange rate is not high, and the flexibility of the RMB exchange rate will be further increased.