Since the introduction of the rmb exchange-rate reform on 21 july 2005, the rmb has continued to appreciate over a period of less than 10 years, and the exchange rate against the united states dollar has spanned the “seven years” of the 8th era, with the expectation that the rmb “breaks six” is growing stronger at the end of last year。
However, on 25 february this year, the immediate exchange rate of the renminbi suddenly collapsed without any expectation. On the same day, when 282 points were frustrated, on 28 february, the renminbi again fell sharply after the opening of the spot exchange rate against the united states dollar, which at one time exceeded 500 points, reaching a minimum of 6. 1808, or 0. 86 per cent。
The chinese state foreign exchange administration has publicly stated that the rapid depreciation of the renminbi against the united states dollar this time is “normally volatile and does not have to be interpreted excessively”. What is the reason for the devaluation? What's the impact? More crucial is: is this the beginning of an era, or is it just an “interlude”, where will the renminbi exchange rate go in the future
Why did the yuan suddenly depreciate
By 2014, the median value of the renminbi had rapidly depreciated from $6. 0969 to $6. 1214, with a depreciation of about 0. 4 per cent, and the spot exchange rate had depreciated from 6. 04 to 6. 18 in the vicinity of 13 january, which had already exceeded 2 per cent. The increase over the past year will almost be fully consumed。
The reason for this is that china’s economic growth has strained china’s foreign exchange and investment institute’s director, tan ya ling, in an interview with the news reporter, stated that the devaluation of the renminbi is highly correlated with the country’s macroeconomic trends. “today, domestic real estate data and manufacturing indicators show pressure. Despite the good export performance of the country in january, data such as pmi indicate that the real economy still has insufficient growth momentum.”
The second reason is that the withdrawal of the united states from qe affected zhang sam-nam, china’s vice-researcher for international economic exchanges, who stated to the media that between december last year and january, the fed moved from its decision to withdraw from qe to its official implementation, with emerging market countries experiencing a sharp devaluation of their currencies. The sharp devaluation of the renminbi this time suggests that the us exit from qe really hit the chinese market。
The reason for this was that the central bank had led to the crowding out of the arbitrage of $10,763 million in january (foreign direct investment), an increase of 16. 11 per cent over the same period; the net bank account doubled to $76. 3 billion, a year high. This has increased china's foreign exchange reserves by an additional $43. 27 billion last year and has exceeded $3. 8 trillion. According to barclay's chief chinese economist chang jian, “capital inflows continued to be strong in january, with no data on large outflows or a sharp deterioration in basics in recent weeks. This also confirms the view that the recent devaluation of the renminbi is mainly a risk-based block for speculative capital by the people's bank.”
2 yuan will enter "two-way fluctuations"
In response to the recent persistent low exchange rate of the renminbi in both domestic and foreign markets, the heads of the relevant departments of the national foreign exchange administration, in a recent interview with journalists, stated that the exchange rate of the renminbi was normal。
Effective 16 april 2012, the currency's daily fluctuations against the united states dollar increased from 0. 5 per cent to 1 per cent. The difference between the maximum current offer and the minimum current purchase price should not exceed the range of 1 per cent to 2 per cent of the average exchange rate at that date。
According to han il, a professor of finance at beijing university of aeronautics and astronautics, two-way fluctuations do not mean that the renminbi will no longer appreciate, but rather that there will be a downward spiral in the trend of slow appreciation, or that it will not be possible to anticipate the trend of exchange rates in the short term。
The national foreign exchange administration has clearly indicated to the outside world that the two-way fluctuation of the renminbi exchange rate will become the norm and that market players should adapt and respond positively。
Which industries benefit
“in the last few years, the continued appreciation of the renminbi has put pressure on domestic export production enterprises, and if the renminbi exchange rate changes the expectation of a unilateral appreciation, it is believed that there will be a general recovery in the productivity of foreign trade enterprises.” guo da yong, director of the china banking research centre of the central university of finance and economics, believed that the weakening of the renminbi to a certain extent would help stabilize exports and thus stabilize the economy。
According to a report by guérienne, the devaluation of the renminbi would enhance the competitiveness of export operations in the united states dollar, such as container, ship, pump, forklift, etc. The devaluation of the renminbi has indirectly contributed to industries such as machinery and electricity in the lower steel industry, where exports of products could improve the domestic steel market。
Depreciation is also good news for the textile and garment industries, which export more. “the company's exports last year were about $1 million. If the current exchange rate is used, more than $1 million can be `earned' for more than 20,000 renminbi.”
Which industries have suffered
The devaluation of the renminbi, while bringing benefits to export-oriented enterprises, also had a considerable impact on other industries. It is the rmb asset-like industries, such as real estate。
The drop in the renminbi's exchange rate has directly reduced the margin space and is likely to drive foreign investment into the chinese market, leading to a decline in the prices of the assets associated with these investments. The real estate market is the most popular place for “hot money”。
Previously, offshore funds had benefited from the double gains of housing price increases and exchange rate increases through the holding of property. If the renminbi enters the devaluation path, the gains from hot money investment in the real estate market will be reduced, and, together with the adjustment of the real estate market itself, the “hot money” that pursues high returns may withdraw, thus triggering a fall in housing prices。
For some energy and raw materials importing enterprises, the devaluation of the renminbi will increase the cost of imports of raw materials, thus affecting the prices of the products concerned downstream。
In addition to the large industries mentioned above, consumption-related industries are expected to be affected, such as study abroad, overseas shopping and tourism。
Five arbitrage deals were strangled
Over the past week, the offshore renminbi has fallen by more than 0. 8 per cent, far more than the 0. 4 per cent devaluation of the offshore renminbi. This means that the offshore currency exchange gap has narrowed, thereby stifling the opportunities for arbitrage by arbitragers to take advantage of the exchange rate。
The operator of an import-export trading company in shanghai informed the press that offshore prices in the rmb would provide arbitrage if they were more than 500 basis points less than those onshore, less bank charges for about 200 basis points. “assuming you have $1 million, the bank can obtain a credit certificate issued by the bank and an annual interest rate of 3. 5 per cent. The interest rate for bank loans to hong kong with credit certificates is 2. 7 per cent. The loan is converted into a renminbi, which flows back into your hands through the `commodity trade'. The difference between the two, combined with the difference in remittances from the appreciation of the renminbi and the depreciation of the united states dollar, has resulted in more than 10,000 dollars being earned by the round.”
According to the financial weekly, bank branches in shenzhen, even specializing in arbitrage with customers, “a company in the former sea, less than half a year old, can get hundreds of millions of loans”
However, following the devaluation of the renminbi, the equivalent of the dollar loan increased interest rates directly by several points, not only to earn but possibly to lose。
What is the impact on investors
The renminbi has depreciated, and none has been more directly harmed than by the sale of investors. According to the british financial times, if the renminbi continues to fall, chinese companies may face billions of dollars in losses due to the associated complex hedge products。
During the past year, the trade in the renminbi derivatives has increased significantly, and investors have been betting that the renminbi continues to appreciate. According to the deutsche bank, a total of $250 billion worth of derivative contracts was traded in 2013, compared to $80 billion to $100 billion in the trade in derivatives to date in 2014。
According to analysts, individual investors and small and medium-sized enterprises are the main players in the mnf-m. Their purchases of structural investment products could yield significant gains when the renminbi appreciated, but if the renminbi continued to weaken, it would suffer huge losses。
Geoff kendrick, head of morgan stanley's foreign exchange department, described the loss of investors of about $500 million per month for every 0. 1 drop in the exchange price, assuming that an investment agency had $350 billion in “cumulative target buy-back” renminbi derivatives。
The devaluation of the renminbi is good news for investors who buy foreign exchange finance products. Journalists on the silver-rate network have seen that, as a result of the devaluation of the renminbi, the return of less than 3 per cent of foreign currency property in the past year has increased to more than 5 per cent in the recent past, following directly the rate of return of the renminbi。
Journalists observed on the home page of the business bank property bill that the bank's annualized return on the australian dollar-based monthly profit of 286 was expected to reach 5. 2 per cent on 27 february。
The bank’s management manager told journalists that the recent accelerated depreciation of the renminbi and the increase in the bank’s foreign exchange demand were the direct reasons for the increase in the value of foreign currency-based property, but in the long run, the recovery of foreign currency-based funds was largely based on prospects of appreciation of foreign currencies such as the dollar。
Will 7 continue to demean
The exchange rate of the renminbi has depreciated by nearly 0. 8 per cent over the past week, and how long will it last
Barclay’s chief chinese economist jian maintained that the recent sharp devaluation of the renminbi was intended by central banks to curb speculative capital flows and reduce potential financial risks, rather than to boost economic growth through a sharp devaluation of the renminbi. The government does not wish to see the continued devaluation of the renminbi and the risk of capital flight. Until real two-way expectations are established, the renminbi will face downward pressure on the exchange rate in the near future, with the median value of the renminbi against the united states dollar reaching 5. 95 at the end of the year, under the continuing effects of trade surpluses, foreign direct investment (fdi) inflows and currency inflows. The same view is shared by the chinese economist fahing bank. In his view, the exchange rate of the renminbi, although required to depreciate, might not be too much. Fobs show signs of capital flight if they continue to be somewhat lower than the domestic rate. In such cases, then, the people's bank of china is likely to stabilize the renminbi again。
According to the report of the strategic planning department of the bank of agriculture, the exchange rate movement in 2013 is clearly unsustainable, as required by the two-way fluctuation of the renminbi, and is well known to all parties in the market. This round of devaluation is a normal return. The recent devaluation of the renminbi is not the beginning of a sharp devaluation of the renminbi, but is a sign of a return to a two-way swing in the renminbi exchange rate, which this year may or will revert to a slight appreciation throughout 2012。
Morgan chase, china’s chief economist, zhu haibin, also expected that the devaluation of the renminbi would be a temporary trend and that it would be moderate in scope, maintaining the forecast of 1 to 2 per cent appreciation of the renminbi in 2014。
