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RMB internationalization indicators are generally positive

International Business News – The People’s Bank of China recently released the “RMB Internationalization Report 2022”, which shows that the indicators of RMB internationalization are generally positive, with RMB’s payment currency function steadily improving, its investment and financing currency function further deepening, its reserve currency function rising and its denomination currency function gradually strengthening. The report also shows that the opening of China’s financial market continues to advance and RMB assets remain highly attractive to global investors.

Third-party data also prove that RMB internationalization is steadily moving forward. According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the RMB’s share of international payments will increase to 2.7% by December 2021, surpassing the Japanese yen to become the world’s fourth payment currency. And data released by the International Monetary Fund (IMF) on the currency composition of official foreign exchange reserves shows that the yuan’s share of global foreign exchange reserves reached 2.88% in the first quarter of 2022, ranking fifth among major reserve currencies.

Normally, the U.S. dollar is the main payment currency in international trade. However, the U.S. sanctions against other countries at every turn have made many countries wary, including India and Russia.

For example, Indian companies are using more Asian currencies to pay for their coal imports from Russia, bypassing the U.S. dollar and reducing the risk associated with violating Western sanctions against Russia, according to Reuters. In July, India’s coal imports from Russia rose sharply, with 31 percent of the non-dollar payments made in yuan and less than a quarter in euros, a trade source said.

Since the outbreak of the Russia-Ukraine conflict, Russia has also been consciously “de-dollarizing” and looking for alternative currencies due to U.S. sanctions. Russia’s Kommersant website reported on Sept. 23 that August statistics released by SWIFT showed that Russia ranked third in the world in terms of offshore payments in yuan, ahead of Hong Kong, China and the United Kingdom.

According to the report, the yuan is the preferred alternative currency to the dollar and euro for Russian banks in the process of “de-foreignization” of the industry. Russian Deputy Finance Minister Alexei Moiseyev said this preference is due to strong demand for the Chinese currency and a stable exchange rate. Director of the First Asian Department of the Russian Foreign Ministry Georgiy Zinoviev said that the share of Russian-Chinese local currency settlements is growing and the demand and volume of transactions in the yuan on the exchange is also increasing.

At the same time, the RMB is being used as a reserve currency by an increasing number of countries. With geopolitical conflicts threatening to erode the dollar’s dominance, central banks are beginning to seek to diversify their foreign exchange reserves with the yuan.

A July report on the Financial Times website noted that concerns about high inflation in the U.S. and the Federal Reserve’s efforts to combat it have also put the dollar under short-term pressure. The survey showed that reserve managers are looking for other alternative assets, such as securities, green lending and inflation-protected bonds, out of concern about holding dollar-denominated assets. Nearly half of the respondents said their portfolios are more diversified than last year.

While the dollar remains the world’s number one reserve currency, its lead has declined in recent years. Global central banks have reduced the dollar’s share of their foreign exchange reserves over the past 20 years, with a quarter of that reduction going to the yuan, according to IMF research released earlier this year.

Experts attribute the share growth to the rise of the Chinese economy and the internationalization of the yuan, the Russia Today TV website reports. They say the yuan’s share growth will also accelerate this year against the backdrop of mutual sanctions between Russia and the West and global financial chaos.

A new study shows that China’s dominance in global trade is increasing the yuan’s share of global central banks’ foreign exchange reserves, as also reported on Bloomberg News’ website in July. If China’s trade and yuan settlements continue to increase, the yuan’s share of reserves will grow, the study’s authors argue.

Experts say that as China’s economic power grows and the yuan’s influence increases with each passing day, the increase in the yuan’s share and size is an irreversible trend.

RMB becomes the 4th payment currency in the world

International Business News – According to the “RMB Internationalization Report 2022” released by the People’s Bank of China, the RMB’s international payment share improved to 2.7% in December 2021, overtaking the Japanese yen to become the world’s fourth payment currency, and further increased to 3.2% in January 2022, a record high.

Since 2021, RMB cross-border receipts and payments have continued to grow from a high base in the previous year. 2021, the total amount of RMB cross-border receipts and payments by banks on behalf of customers was RMB 36.6 trillion, up 29.0% year-on-year and a record high. RMB cross-border payments and receipts were generally balanced, with a cumulative net inflow of RMB 404.47 billion for the year. According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the RMB’s share of international payments increased to 2.7% in December 2021, overtaking the Japanese yen to become the world’s fourth payment currency, and further increased to 3.2% in January 2022, a record high. Currency Composition of Official Foreign Exchange Reserves (COFER) data released by the International Monetary Fund (IMF) show that the RMB’s share of global foreign exchange reserves reached 2.88% in the first quarter of 2022, up 1.8 percentage points from 2016 when the RMB first joined the Special Drawing Rights (SDR) currency basket, ranking fifth among major reserve currencies.In May 2022, the International Monetary Fund (IMF) raised the RMB’s weighting in the Special Drawing Rights (SDR) from 10.92% to 12.28%, reflecting recognition of the increased degree of free access to the RMB.

The volume of cross-border RMB settlement related to the real economy maintained rapid growth, with areas such as bulk commodities and cross-border e-commerce becoming new growth points, and cross-border two-way investment activities continued to be active. The RMB exchange rate generally showed a two-way fluctuation trend, and the endogenous demand of market players to use RMB to hedge exchange rate risks gradually grew. The basic system of RMB cross-border investment and financing, transaction settlement, etc. continues to be improved, and the ability to serve the real economy continues to be enhanced.

The opening up of China’s financial market continues to advance, RMB assets remain highly attractive to global investors, and there is an overall net inflow of RMB cross-border receipts and payments under securities investment. By the end of 2021, the total amount of domestic RMB stocks, bonds, loans and deposits held by foreign entities was RMB 10.83 trillion, up 20.5% year-on-year. The offshore RMB market gradually picked up and transactions became more active. By the end of 2021, RMB deposits in major offshore markets were close to RMB 1.50 trillion.

RMB depreciates against USD

International Business News – After two years, the RMB exchange rate is back below 6.90 yuan.

On the morning of August 29, the RMB’s mid-price against the USD was at 6.8698, down 212 basis points from the previous trading day. The onshore and offshore RMB/USD exchange rates both fell below the 6.90 mark, making people wonder if it will break 7 if it continues.

Why did the dollar strengthen? Julius Investment Advisory senior investment advisor Xie Logistics said in an interview with the International Business Times reporter, first, the dollar is strong relative to the euro and the yen strong, the Bank of Japan continued quantitative easing led to the yen depreciation trend is obvious, the Russia-Ukraine conflict, the eurozone capital outflow, the United States plays the role of a safe haven for funds. The second is the interest rate hike factor. The Fed’s tightening monetary policy has made the US dollar appear more scarce in the global market, prompting the dollar to strengthen.

Hongze Capital founding partner and chief strategist Xu Yaxin told the International Business Times that, on the one hand, the impact of the Russian-Ukrainian geopolitical crisis in the first half of the year, high energy prices, which in turn pushed inflation higher, with the Federal Reserve as the main central banks have opened the interest rate hike cycle. Successive interest rate hikes to market expectations of the future economy into recession is expected to heat up, the dollar as a safe-haven assets continue to increase in attractiveness. On the other hand, the Fed and other central banks to widen the interest rate differential, many Fed officials frequently released hawkish remarks, while non-US currencies euro, pound and yen continued to weaken, disguised to enhance the dollar upward momentum.

“The recent hawkish remarks from the Fed’s Powell, stressing that it will continue to tighten monetary policy to reach the goal of inflation control, gave great support to the short-term strength of the dollar.” Chen Yucheng, a senior investment advisor at Jufeng Investment Consulting, told International Business Daily that the RMB exchange rate, as a relative price, depends on the strength of demand for the RMB versus foreign currencies. The strong dollar natural RMB will be relatively weak.

For the recent fall in the RMB exchange rate factors, Xie logistics analysis, said, one is the further relaxation of domestic monetary policy, the recent MLF and LPR interest rate cut, the exchange rate of short-term disturbance; two is the pace of the Federal Reserve interest rate hikes did not slow down, the euro continued to weaken; three is the repeated epidemic, Sichuan power restrictions and other factors make the capital for the domestic economic recovery process concerns.

“If the inversion of the interest rate gap between China and the United States continues to widen, the exchange rate has a certain possibility of breaking 7.” Xie Logistics said, but the RMB’s supporting factors continue to be stable, and there is no basis for long-term depreciation.

Chen Yucheng also believes that from the current account, China’s exports remain resilient. In the long run, the support for the yuan comes from domestic economic repair, so there will be no unilateral depreciation, and breaking 7 is a small probability event.

“From the overall trend of the yuan this year, it is just weak relative to the dollar.” Xu Yaxin gave a set of data, the yen, the euro and the British pound so far in the year, relative to the dollar depreciation of 20.65%, 12.82% and 13.82% respectively, while the yuan against the dollar only depreciated 8.87% in the year. “So, it is not critical for the RMB to break 7 against the dollar, and the RMB remains relatively strong relative to the performance of many other countries’ exchange rates. The domestic adoption of an accommodative monetary policy will certainly bring depreciation pressure on the short-term exchange rate, but stabilizing economic fundamentals is more conducive to the confidence of funds in the medium and long term, and there is no need to worry too much about the short-term depreciation of the RMB against the dollar.”

RMB exchange rate “broken 7”

On September 16, the 10-year Sino-US spread was inverted to 74 basis points, and the depreciation pressure on the RMB exchange rate was self-evident, with the RMB once surging to 7.0254 against the U.S. The “breaking of 7” of the RMB against the U.S. dollar immediately drew the attention of the whole market. So far this year (as of September 16, the same below), the RMB has depreciated by 9.88% against the USD, but compared to other currencies, the performance of the RMB has been relatively solid.

On August 26, 2022, at the central bankers’ meeting in Jackson Hole, Fed Chairman Powell’s hawkish statement implied that the Fed would continue its aggressive rate hike and tapering policy. Since then, the yield on the 10-year U.S. Treasury note has moved higher again, climbing to 3.44% by September 16. Wall Street predicts that the U.S. 10-year Treasury yield will rise to 3.75 percent by the end of the year and will peak at 4.0 percent in 2023. So far this year, the dollar index has risen 14.65%.

Both the euro and the yen have fallen to 20-year lows against the dollar. As of Sept. 16, the dollar had depreciated 38.4 percent against the yen from the end of 2020 all the way through the year. The euro, which has been falling against the dollar since June 2021, depreciated by a total of 22% by Sept. 16. The British pound has also been on the decline since June 2021, depreciating by 24.3% against the dollar by September 16. This is still the currency trend of major economies, and some developing countries have seen even more outrageous currency depreciation.

In terms of horizontal comparison with other currencies over the same period, the RMB real effective exchange rate index has only declined slightly by 2.8% this year, the reason behind this is that the RMB has appreciated significantly against other mainstream currencies, with the RMB appreciating 3.1% against the Euro, 6.2% against the British Pound and 12.6% against the Japanese Yen since the beginning of the year. From the perspective of a basket of exchange rates, the overall CFETS RMB exchange rate index is still appreciating from the beginning of the year, reflecting that the RMB exchange rate index is not weak so far this year. This indicates that the weakening of the RMB is only relative to the USD.

The logic behind the “broken 7” exchange rate

The analysis of the bilateral exchange rate, in the long run, depends mainly on the difference in labor productivity between the two countries, that is, in the framework of the “Balassa-Samuelson effect”. However, in the short to medium term, the main factors determining the bilateral exchange rate are the difference in economic growth between the two countries, the inflation differential and the interest rate differential between the two countries, as well as the sentiment of international investors derived from these three factors.

Since 2022, the RMB has depreciated against the USD, mainly due to the rapidly widening long-term interest rate differential between the US and China and the pessimistic investor sentiment caused by expectations of economic growth.

Since 2020, the U.S. economy has grown strongly, with the U.S. manufacturing PMI consistently above the RongKu line and a more stable level of non-manufacturing PMI. The preliminary U.S. University of Michigan Consumer Confidence Index for August was 55.1, up 7 percent from the previous year. On the capacity side, capacity indicators, such as industrial, manufacturing, and consumer goods output, have been picking up since the second quarter of 2020 and have surpassed their pre-epidemic levels since the second quarter of 2022.

In addition, the U.S. job market remains strong, with 315,000 new nonfarm payrolls in August, higher than the expected value of 300,000, and an unemployment rate of 3.7%, the highest since February this year; the labor force participation rate of 62.4%, the highest since the epidemic. The unemployment rate has been declining since April 2020 at 14.7% and will largely return to its pre-epidemic low by the second quarter of 2022, demonstrating strong employment resilience.

The Russian-Ukrainian conflict has brought about rising international energy prices and sudden inflationary pressure in the U.S. The U.S. CPI reached 8.5% year-on-year in July. Against this backdrop, the Federal Reserve has chosen to tighten its monetary policy, from the initial reduction in the size of quantitative easing to the subsequent successive rate hikes, and the rate hikes are large and expected to accelerate tapering in the future.

After the market expects the Fed to keep tightening monetary policy, the U.S. 10-year Treasury yield has climbed significantly, from the beginning of the year all the way up to 3.44% now. Investors now expect the Fed to raise interest rates by 75 basis points next and expect the yield on the 10-year U.S. Treasury to rise to 4 percent next year.

In China, economic growth slowed significantly in the second quarter, with GDP growth of just 0.4% year-on-year, as many parts of the country were hit by the epidemic. Concerns in the foreign exchange market about the future of the Chinese economy followed.

In order to achieve stable growth, the central bank adopted a moderately accommodative monetary policy. The central bank cut the medium-term lending facility (MLF) and open market reverse repo (OMO) rates by 10 basis points each on Aug. 15, exceeding market expectations. It then guided the loan market offer rate (LPR) down in line with the trend, including a 5 basis point cut for the 1-year period and a 15 basis point cut for the 5-year period and above, increasing support for medium- and long-term loans such as real estate mortgages.

The reverse operation of the central bank and the Fed caused the long-term interest rate differential between the two countries to widen rapidly. By Sept. 16, the U.S. 10-year Treasury yield was 74 basis points higher than the Chinese 10-year Treasury yield. The inverted and widening spread between the U.S. and China could trigger some cross-border capital flows from China to the U.S., which could depress the yuan against the dollar.

Since July and August, the epidemic has eased. On September 16, the National Bureau of Statistics announced the economic data for August. On the whole, the economy has gradually recovered, infrastructure has remained relatively resilient, manufacturing investment is still strong, the year-on-year growth rate of total retail sales of social consumer goods has rebounded to 5.4%, and the national urban unemployment rate has been surveyed. Further downside to 5.3%.

However, economic concerns remain. Exports fell sharply in August, real estate was weak, and various real estate data still failed to stabilize and rebound, and were still in the process of bottoming out. The unemployment rate for youth aged 16 to 24 in August was 18.7%, indicating that youth employment pressure is still relatively high. In addition, both corporate deposits and household deposits showed super-seasonal growth in August, reflecting the weak willingness of enterprises and households to spend.

Under such a situation, the central bank will pay more attention to the domestic economic trend than the exchange rate. After all, the important factor that determines the future exchange rate trend is the strong growth of the future economy, so the central bank still chooses a moderately loose monetary policy. The six state-owned banks of China Construction Communications and Postal Savings Bank, as well as China Merchants Bank, announced in unison that they would cut interest rates on personal deposits. This reverse operation will further widen the 10-year interest rate gap between China and the United States in the short term, increasing the short-term depreciation pressure of the RMB.

The impact of a weaker renminbi

For example, airlines, real estate, etc., will worsen their balance sheets. But for the export processing industry, it will obviously increase their international competitiveness and will improve their business conditions. in August, China’s exports grew by 7.1% year-on-year in dollar terms, a sharp drop from the growth rate in June (17.9%) and July (18%), and a moderate devaluation is good for stabilizing exports.

In the financial markets, the outflow of funds will increase the volatility of the market.

As far as the stock market is concerned, overseas funds can influence the Chinese stock market through the Shanghai-Hong Kong Stock Exchange, Shenzhen-Hong Kong Stock Exchange and QFII, but the current openness of the Chinese stock market is not too high, and the change of these funds will only have a limited impact on the market in the short term, and the main factor affecting the stock market in the medium and long term is the trend of the Chinese economy. If the Chinese economy can return to a higher growth rate in the future, or form a new economic growth cycle, then the Chinese stock market will naturally come out of the good market, and of course the RMB exchange rate will be strong.

However, we cannot ignore that the market sentiment brought by the strong dollar will increase the volatility of the financial markets, and if we do not grasp the rhythm, it may trigger panic among investors, which needs to be wary.

Of course, at present, the central bank has many tools to prevent sharp fluctuations in the local currency exchange rate, such as counter-cyclical factors, foreign exchange deposit reserves, forward foreign exchange sales reserves, capital flow management, and macro-prudential management at the foreign exchange level. And judging from the trend of the renminbi this year, the central bank has also used these tools. For example, after the Federal Reserve announced interest rate hikes this year, the central parity rate of the renminbi against the US dollar exceeded market expectations. In contrast, the exchange rate of the RMB against the US dollar has remained relatively stable, which shows that the central bank is already using these tools to adjust.

Even in the worst case scenario and investor panic, as China has not fully opened its capital account, the central bank can limit short-term capital outflows in the event of sustained large-scale capital outflows, such as limiting the number of foreign exchange exchanges, or levying trusteeships. Bin tax and other methods to stabilize the market.

Therefore, given the moderate depreciation of the RMB against the U.S. dollar and the relative flexibility of the RMB exchange rate formation mechanism, there is no need to worry about the sharp depreciation of the RMB, much less the financial market turmoil that some investors worry about.

Prediction of the future trend of RMB

The trend of a country’s exchange rate is ultimately determined by the country’s economic development capability, that is, how the RMB exchange rate will trend in the future depends on the fundamentals of China’s economy in the future.

Therefore, China’s monetary policy is still based on the fundamentals of its own economic development, and the exchange rate market is only one factor that needs attention in the short term. At present, China’s economy is still lacking in aggregate demand, so monetary policy will remain moderately loose to achieve stable growth, and interest rate cuts will remain policy options in the future. Moreover, in fact, under the premise that the world’s major currencies are depreciating sharply against the US dollar, the moderate depreciation of the RMB against the US dollar will help maintain the stability of the effective exchange rate of the RMB, and there is no need to hold it dead.

To assess the future direction of the US dollar index, it is also necessary to look at the relative position of the euro area and Japan. Since 2021, the manufacturing and service PMIs in the euro area have also been on a downward trend. In August, the manufacturing PMI recorded 49.6, falling below the line of prosperity and decline and hitting a new low in 18 months. Inflation in the euro zone hit 8.9% year-on-year in July, driven by the energy crisis.

In Japan, the macroeconomic situation is still hardly optimistic. 2022 years, the impact of the Russia-Ukraine conflict and rising energy prices, Japanese machinery orders fell and the CPI index rose sharply. Japan is highly dependent on energy imports, and imported inflation poses a big challenge to the Japanese economy. The BOJ’s assessment of the downside risks to the economy remains higher than the upside risks to inflation and continues to maintain an accommodative policy orientation.

In the short term, inflation in the U.S. will remain high and the economy is still operating in an expansionary region, and the Fed is expected to continue to implement interest rate hikes and tapering and adopt a tight monetary policy.

Taken together, the dollar index is expected to rise further in the coming period.

Since China implements a monetary policy based on China, even if the exchange rate of RMB against the US dollar “breaks 7” in the short term, there is no need to make a fuss. With the evolution of the Fed raising interest rates and shrinking the balance sheet, the US economy may enter a recession in the future. In the future, China will focus more on economic growth. If the economic growth rate picks up significantly, the exchange rate of RMB against the US dollar will return to the appreciation channel.