When the offshore RMB hits 7, you shouldn't panic.

When the offshore RMB hits 7, you shouldn’t panic.

Since August, the value of the offshore RMB has decreased by nearly 4%, while the value of the onshore RMB has decreased by more than 3.5%. This information was provided by Li Yiyan and Jia Ming.

On September 5, the central bank made an announcement that the foreign exchange deposit reserve ratio of financial institutions will be lowered from 8% to 6% on September 15, 2022. This change will take effect. On the other hand, on September 15, after the offshore RMB exchange rate had been hovering around 6.97 for the previous day, at five o’clock in the afternoon it shot up to 7.0187, officially “breaking 7.” The onshore renminbi finished trading at 6.9775 yuan on the same day, reflecting a further depreciation of 145 basis points from the official closing price of the previous day.

Every time the RMB exchange rate approaches 7, the market will always be extremely nervous, and the debate on whether to maintain 7 or not will begin. This is similar to how the market debated whether China’s economic growth should be maintained at 7 or 6.

  1. If the RMB falls in value, what is the market most concerned about?

In theory, the effects that changes in exchange rates have on various market entities are distinct from one another. For instance, the devaluation of the renminbi can help improve the competitiveness of exporting companies and reduce the financial pressure on those companies, but it will increase the cost of importing companies and worsen the financial conditions of those companies. Additionally, it will help improve the balance sheets of companies that hold foreign currency assets, but it may also increase the holdings of those companies. Companies with foreign currency liabilities are under significant financial pressure. As can be seen, there is no evidence to support the conclusion that a rise in the value of the RMB currency is desirable, whereas a fall in its value is undesirable. On the other hand, it appears that a devaluation of the renminbi is more likely to cause concerns in the market than an appreciation of the currency.

The first worry is that a weaker RMB will make it difficult to conduct monetary policy. According to the theory of interest rate parity, currencies with high interest rates will be subject to depreciation pressure, and the greater the interest rate spread, the greater the pressure will be. However, what we see happen in practice on a regular basis is that currencies with high interest rates tend to increase in value. The larger the interest rate gap, the greater the pressure there is for the currency to appreciate. The monetary authority of a country has the ability to stabilize the exchange rate by increasing interest rates if the currency of that country suffers a significant depreciation. For instance, during the first three quarters of 2018, emerging market currencies faced greater pressure to depreciate, and Argentina and Turkey experienced standard currency crises as a result of the tightening of global dollar liquidity. In spite of the fact that the economic underpinnings of these two countries are extremely precarious, the central banks of these two countries will need to implement a number of policy measures, including an increase in interest rates, in order to maintain the stability of the exchange rate. In a similar vein, the market has a tendency to worry that the central bank may need to raise interest rates in order to stabilize the exchange rate when there has been a rapid depreciation in the value of the RMB exchange rate. Please click this link to enter the FT Chinese website so that you can continue reading.

Nihon Keizai Shimbun and Financial Times (FT)

In November of 2015, Nihon Keizai Shimbun and the Financial Times merged together to form a single media group. Under the banner of “high-quality, most powerful economic journalism,” the alliance that was formed by two Japanese and one British newspaper, both of which were also established in the 19th century, is promoting collaboration in a wide range of fields, including joint specials. Articles were traded back and forth between the Chinese websites of the two newspapers during this particular round of it.

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