How fast is this round of depreciation?
The exchange rate of the US dollar against the RMB rose from 6.38 to 6.52. The exchange rate reached a new high since July 2021. From July last year to early March this year, the RMB continued to appreciate. In the past week alone, the magnitude of the depreciation of the RMB exchange rate has spit back all the appreciation accumulated in the past eight months. Moreover, the RMB depreciated by 1300 basis points in a single week, the highest in a single week since the "811 foreign exchange reform" in 2015.
The current round of sharp depreciation of RMB has limited explanatory power of traditional interest rate spread factors.
Under the traditional framework, the depreciation of RMB exchange rate is explained by the interest rate difference between China and the United States. Since April, the devaluation of the RMB, a background that can not be ignored is the rapid rise of US bond interest rates, the rapid narrowing of China US interest rate spread, and even the upside down of the 10-year US interest rate spread. The reason behind the recent devaluation of the currencies of East Asian economies such as Japan and South Korea against the United States is that the interest rate of US bonds continues to rise. Like these countries, the interest rate difference between China and the United States also has a certain explanatory power for the current round of RMB devaluation. However, it should be noted that if the interest rate spread has a strong explanatory power on the exchange rate, it needs to meet a premise that the cross-border capital flows smoothly. The capital and financial market linkage between China and the United States is far inferior to that of developed economies such as Europe, America, the United States and Japan. This also determines that the explanatory power of China US interest rate spread on the RMB exchange rate is much weaker than that of yen, won and other currencies.
Empirical data show that the narrowing of the interest rate gap between China and the United States is indeed not the whole reason for the current round of RMB exchange rate depreciation. After all, since the second half of last year, US bond interest rates have been rising and the interest rate gap between China and the United States has been narrowing. However, the RMB exchange rate has maintained a rare appreciation toughness.
In this round of sharp devaluation of the RMB, more contradictions are due to internal factors in the supply chain caused by the epidemic.
We understand that the most important reason why the interest rate gap between China and the United States is contrary to the RMB exchange rate since the outbreak is that China's exports have supported the extremely high demand for foreign exchange settlement.
This round of RMB exchange rate depreciation seems to be driven by the rapid depreciation of RMB exchange rate in the offshore market. The answer at the transaction level is that the trading volume of the inter-bank foreign exchange market has shrunk sharply since April. At present, the average daily transaction scale of the inter-bank foreign exchange market is close to March 2020, even lower than that in most of 2018.
Transactions in the rapidly shrinking inter-bank foreign exchange market directly show that the current export exchange rate has plummeted. Behind the contraction of export exchange rate is the attenuation of export kinetic energy. We can get synchronous verification on the decline of PMI orders in March, the number of inbound ships in April and the freight logistics index in April.
In the first quarter of the year, exports were still 15% year-on-year. Exports fell sharply in April due to the disturbance of the epidemic in China. We know that the biggest difference between this round of epidemic and the previous local epidemic is that the current supply chain is constrained. No matter China's logistics or foreign port cargo transportation, we have not seen effective measures to break through the supply chain constraints in the short term, and industrial production and exports have been substantially repaired.
When the most important driving force supporting China's economy, exports and industrial production, are also under pressure, RMB assets are expected to face revaluation in the end. The recent CDs quotation of China's sovereign debt was 73.4, higher than that in 2018 and February 2020.
How to view the subsequent trend of RMB exchange rate?
Looking at the moment, the transaction factors determine that the RMB exchange rate has been sharply devalued since April 18, or come to an end. In the short term, the trend of RMB exchange rate depends on two factors: resumption of work and production and the pace of steady growth. After all, supply chain constraints and export production pressure are the root causes of this round of RMB devaluation. Only by stabilizing China's economy can the rapid depreciation of the RMB exchange rate usher in easing.
Looking ahead to the long term, we believe that the RMB appreciation trend started by this round of epidemic may have ended. It is expected that global trade has entered a period of contraction. Under this trend, it may be difficult for the RMB exchange rate to remain strong.
Risk warning: the duration of the epidemic exceeded expectations; Overseas inflation continued to rise higher than expected; Exports worsened more than expected
