Recently, the RMB exchange rate has continued to weaken. The RMB exchange rate, which broke 7 in May, continued to fall below 7.1.
On June 1, the onshore yuan closed at 7.1179 against the US dollar, the offshore yuan closed at 7.1042 against the US dollar, and the central parity rate of the yuan against the US dollar was 7.0965, both hitting new lows this year. However, on June 2, the onshore yuan’s mid-price strengthened 429 basis points against the US dollar and 26 basis points to 7.0750 and 7.0939, respectively. Offshore yuan also retreated to within 7.1 against the dollar as of press time.
Trend of US dollar versus onshore RMB
Trend of USD against offshore RMB
In this regard, experts said that the RMB does not have the basis for long-term depreciation, the current trend or “first suppress and then raise”.
What is the reason?
There are both internal and external reasons for the RMB to fall below two important thresholds in succession.
Looking at external factors, experts point to the resilience of the US economy and inflation, among other factors, as contributing to the rapid strengthening of the dollar index.
Ming Ming, chief economist of Citic Securities, believes that since mid-April this year, the dollar index has risen again, driven by the relative resilience of the US economy, the stickiness of inflation that is slightly higher than expected, the hawkish remarks of the Federal Reserve officials that led to the correction of market interest rate cut expectations, and the debt problems that disturbed market risk appetite.
Under the strong US dollar, most non-US currencies depreciated to varying degrees, among which the Japanese yen depreciated 4.9% against the US dollar, the euro, Australian dollar, New Zealand dollar and other currencies also showed weak performance, and the RMB depreciated 3.3% against the US dollar during the same period.
Looking at internal factors, China’s manufacturing purchasing managers’ index, non-manufacturing business activity index and composite PMI output index came in at 48.8 percent, 54.5 percent and 52.9 percent respectively in May, down from 0.4, 1.9 and 1.5 percentage points in the previous month. Zhao Qinghe, senior statistician at the Service Industry Survey Center of the National Bureau of Statistics, said that the economic boom has fallen and the foundation for recovery needs to be consolidated.
Will it keep falling?
Despite the obvious fluctuations in the RMB exchange rate, experts generally believe that in the long run, the Chinese economy is stable and improving, and the room for further weakening of the RMB is limited.
Ming said that the yuan may remain weak in the short term. Entering the third quarter, with the weakening of the US dollar index and the bottoming out of the domestic economic momentum, the RMB is expected to gradually stabilize and enter the path of appreciation driven by the easing of internal and external pressures.
Huang Wentao, chief economist at Citic Jiantou Securities Research, said that in the long run, China’s economy is stable and improving, with sufficient policy reserves, and there is no basis for continued depreciation. After the Fed meeting in June, the dollar index is expected to enter a phased top as the boot drops. With the weakening of the dollar, the yuan will stabilize and even enter the path of appreciation.
Guan Tao, global chief economist of BOC International Securities, wrote that with the coordinated efforts of macro policies, the economy and society will return to normal operation. If positive factors accumulate further and the domestic economy recovers in shock, it will form strong support for the RMB exchange rate this year while China’s basic balance of payments is still relatively strong.
In addition, Guan Tao noted that despite the RMB’s recent break below 7, it did not deviate from the broad volatility, slightly stronger benchmark scenario. Moreover, the accelerated adjustment of the RMB exchange rate since mid-April has not affected the stability of domestic financial markets.