Since 2022, the RMB has been stronger. This report explores the reasons for the recent “counter trend” appreciation of the RMB exchange rate, and further looks forward to the trend of the RMB exchange rate in 2022. We believe that the basis for the strong RMB exchange rate in 2022 still exists, but the appreciation momentum is facing weakening. With the export growth may slow down gradually, or release greater flexibility in the direction of depreciation.
I. at present, the basis of the strong RMB exchange rate has begun to change marginally. Including: the seasonal peak of foreign exchange settlement and sales has passed; The overseas epidemic shows signs of improvement; The monetary policy between China and the United States is divided, and the interest rate gap between China and the United States has narrowed significantly; There is no “herd effect” of RMB appreciation expectation.
II. However, since the beginning of 2022, the RMB exchange rate has appreciated “against the trend”. This is mainly supported by three factors: first, the continuous and substantial growth of foreign exchange settlement funds has become the most key factor to support the appreciation of RMB exchange rate; Second, when geopolitical conflicts escalate, the RMB shows a certain nature of risk aversion. The recent positive progress in the internationalization of RMB has also helped to improve the attractiveness of RMB assets. Third, the “turning Eagle” of the European Central Bank and the Bank of England has restrained the rise of the US dollar index to a certain extent, and the US dollar level has not exerted too strong depreciation pressure on the RMB exchange rate.
III. from the perspective of policy orientation: “giving full play to the function of exchange rate regulating macroeconomic and automatic stabilizer of balance of payments”, the RMB exchange rate may need to release greater flexibility in the direction of depreciation. In 2022, the downward pressure on China’s economy will increase, and the moderate depreciation of RMB will help to strengthen the support for the real economy in line with the monetary policy; In the case of the dislocation of China’s and overseas monetary policy cycles and the significant narrowing of the interest rate gap between China and the United States, the release of flexibility in the depreciation direction of RMB is conducive to alleviating the market fluctuations caused by the rapid entry and exit of cross-border capital. Of course, this does not mean that the central bank should conduct normal intervention in the foreign exchange market, but only that the tolerance of the policy towards the moderate depreciation of the RMB exchange rate may be increasing.
IV. from the perspective of economic fundamentals: the weakening of the support of strong exports for the RMB exchange rate may not be far away. First, since the fourth quarter of 2021, the United States has accelerated inventory replenishment, which means that the spillover effect of subsequent U.S. demand will tend to weaken. Second, since the second half of 2021, the increase of China’s export market share mainly comes from the decline of market share in the United States, Mexico, Canada, Europe and Southeast Asia (at present, the exports of Europe and Southeast Asia are mainly affected by the mutant virus). Subsequently, with the improvement of the epidemic situation, China’s export market share will face downward pressure.
V. from the perspective of the US dollar index: the US dollar index may not strengthen significantly in 2022, which will not bring too much depreciation pressure to the RMB exchange rate. First of all, in 2022, the degree of “dominance” of the US economy in the world is facing weakening, and the basis for the sharp strengthening of the US dollar index may no longer be. Secondly, historically, after the Fed tightened, the dollar index weakened in shock in most cases. Since the beginning of 2022, the market has fully accounted for the Fed’s interest rate hike. After the interest rate hike is officially opened (superimposed table reduction operation), it is bound to have a tightening effect on the US economy, and the action on the US dollar index is more likely to be weakened. Of course, when geopolitical conflicts are still evolving, the US dollar’s risk aversion attribute is obvious, which may still push up the US dollar index in stages.
