By Chan Kung and Wei Hongxu *
Amid the economic recovery in the United States and rising inflation expectations, long-term US Treasury yields have risen steadily and the US dollar has reversed the depreciating trend that began in the second half of the year. last year. Under the influence of the âtaper tantrumâ effect, the US dollar began to appreciate continuously, thus reversing the appreciating trend of the RMB. As the US dollar has fallen in recent days after US jobs data indicated a recovery and the government’s ongoing stimulus package, uncertainty over Fed policy amid the strong inflation expectations will keep the greenback in a sustained trend. New changes in the global monetary environment in the post-pandemic period pose new challenges to the stability of the RMB exchange rate.
The RMB remains closely tied to the US dollar, both in terms of historical data and the RMB central parity rate. According to Reuters, the RMB lost 1.49% against the dollar in March, ending a nine-month winning streak and posting its biggest monthly decline in 19 months. During the month, yields on US Treasuries continued to rise, dragging down a strong dollar; the dollar index rose 2.59% in a single month and passed the 93 mark; the RMB depreciated 1.49% against the dollar at 6.5566. The onshore USD / RMB exchange rate also stayed above 6.56 in April, before recovering slightly to 6.55 on April 6.
A recent ANBOUND analysis cited the impact of rising inflation expectations in the United States on the dollar index as the main reason for the volatility of the RMB exchange rate. On the one hand, the strong dollar policy of the new US administration has started to be implemented. On the flip side, optimism about the US economic recovery is pushing dollars back, and the new US administration continues to roll out new stimulus packages, which are contributing to rising US inflation. Data showed that the 10-year US Treasury yield continued to rise and the China-US interest rate differential narrowed from a high of 250 basis points. at 145, exerted significant pressure on the RMB. In addition, the new US administration is becoming increasingly competitive with China, making geopolitical tensions between China and the United States a new factor of uncertainty on the RMB exchange rate. These factors will cause the RMB exchange rate to fluctuate against the US dollar at the same time as the trend of the US dollar.
However, the ANBOUND researchers also noted that the âtaper tantrumâ impact of the strong US dollar policy could lead to increased volatility of the RMB exchange rate and a trend of phase depreciation, but in the long run. , the room for the RMB exchange rate to change is still limited. First, the Chinese economy has also maintained a strong recovery and growth momentum. Various prominent data shows that China’s economic growth in the first quarter will exceed expectations, which is the basis for the stability of the RMB exchange rate. At the same time, the moderate depreciation of the RMB exchange rate is conducive to further growth of Chinese enterprises’ exports to the United States, which will relieve the pressure caused by rising commodity prices. Second, some emerging economies face higher risk in a strong US dollar, causing international capital to some extent to seek to allocate assets in RMB to achieve relatively stable returns. China’s relatively stable monetary policy in the face of political uncertainty from the Fed also helped moderate the depreciation of the RMB.
By comparing monetary policy since the COVID-19 pandemic with monetary policy after the 2008 financial crisis, the Fed’s monetary policy cycle has become shorter and the policy adjustment range has been wider. During the pandemic, the Fed cut interest rates to zero and implemented unprecedented ultra-easing in a very short time. A little over a year later, market participants are already talking about the end of the Fed easing and the resumption of rate hikes. The Fed is expected to start raising rates in two years and is expected to stop quantitative easing before then, meaning policy will remain loose for about two years, significantly shorter than in the past. What worries the market more is that if inflation is higher than expected, the Fed should end easing prematurely and accelerate the pace of interest rate hikes. Although in the long term, the influence of the dollar in the global economy is gradually waning, the dollar still has an important influence in the short term. In this case, the Fed’s substantial policy changes will not only bring volatility to the US economy and capital market, but will also impact the stability of the currencies of various countries, including the RMB. In fact, this change was evident during last year’s pandemic. The RMB exchange rate has fluctuated sharply from a high of 7.13 in May of last year to 6.42 at the end of January of this year, a significant fluctuation of over 10%.
New changes in the global economy in the post-pandemic period have made the international environment facing the RMB different from that of the past. From a global perspective, China and the United States are expected to continue their strong economic recovery. China has taken the lead in the recovery thanks to better control of the pandemic and its strong economic resilience. The United States, with its faster vaccination, should be the first to achieve herd immunity and therefore a rapid recovery in economic activity. In other regions, the slow pace of vaccination and the spread of the pandemic continue to weigh on the economy. The IMF warns that in the post-pandemic period, the trend of divergence in the global economic recovery has become increasingly evident, with divergences not only between developed countries, but also between developed countries, emerging markets and underdeveloped countries. In this case, even if the RMB depreciates against the dollar, it may still appreciate against other currencies. This will impact China’s trade and investment with other countries.
As ANBOUND pointed out, exchange rate stability is actually a stabilizer for the entire Chinese economy. The new changes mean that China needs to consider some degree of âdecouplingâ the RMB from the dollar to avoid being overly influenced by the dollar, which would hamper the Chinese economy under the Fed’s monetary policy. A recent discussion paper from the People’s Bank of China (PBoC) suggested that a global RMB exchange rate pricing mechanism should be considered as part of the new development model. The PBoC working paper points out that, first, the role of various exchange rate derivatives in the formation of the exchange rate should be investigated, the RMB exchange rate futures market should be established in a timely manner, and the Relevant domestic entities should be guided to use the offshore futures market to avoid currency risks. Second, it should strengthen the monitoring of global RMB flows, asset allocation and price changes, improve the RMB macroprudential exchange risk management system, and steadily advance the internationalization of the RMB. Such attempts are expected to be a new trend in geo-monetary changes, pushing for greater independence of the RMB.
Conclusion of the final analysis:
Global circumstances now mean that the factors influencing changes in the RMB exchange rate are different from those of the past. The international monetary environment, dominated by the US dollar, and the post-pandemic economic environment will be different from the past. Such a trend also indicates a new direction in the evolution of geocurrency.
*Founder of Anbound Think Tank in 1993, Chan Kung is one of the renowned Chinese experts in information analysis. Most of Chan Kung’s outstanding academic research activities focus on the analysis of economic information, particularly in the area of ââpublic policy.
*Wei Hongxu, graduated from the School of Mathematics of Peking University with a doctorate. in Economics from the University of Birmingham, UK in 2010 and is a Research Fellow at Anbound Consulting, an independent think tank headquartered in Beijing.