The RMB exchange rate depreciation pressure has not changed substantially

In the newly released China Government Work Report 2017, the “exchange rate” appeared twice. For the first time in the 2016 work summary, “the RMB exchange rate formation mechanism has been further improved, maintaining a basic stability at a reasonable and balanced level, and safeguarding the national economic and financial security”; the second appearance in the 2017 work arrangement "Adhere to the reform direction of the exchange rate market and maintain the stable position of the renminbi in the global monetary system."
How to interpret the changes in the wording of the RMB exchange rate in the above report? In my opinion, first, this shows that the Chinese government is more satisfied with the current RMB exchange rate formation mechanism, and believes that the current mechanism reflects both the market-oriented reform direction and the exchange rate stability. Second, it shows that the Chinese government is trying to let the RMB exchange rate The problem gradually faded out of public focus in 2017, which means that there will be no new big moves in the RMB exchange rate reform in 2017. Thirdly, this shows that the Chinese government will not let the RMB exchange rate against the US dollar fall sharply in 2017, because it is possible Damage "the stable position of the renminbi in the global monetary system."
In fact, the government work report is very emboldened on the issue of the RMB exchange rate, which is probably due to some important changes in the RMB exchange rate since the second half of 2016. First, compared with the continuous decline in the exchange rate of RMB against the three major currency baskets (CFETS, BIS and SDR) in the first half of 2016, the RMB against the three major currency baskets has been in the narrow range of 94-96 since the second half of 2016. Fluctuations, this shows that the effective exchange rate of the renminbi seems to have stabilized; second, since the beginning of 2017, the exchange rate of the renminbi against the US dollar has generally appreciated, from about 6.95 at the beginning of the year to around 6.87-6.90 in early March. It is precisely because of the above positive changes that there are even some very optimistic views on the current market. For example, the exchange rate of RMB against the US dollar will not break in 2017, and the exchange rate of RMB against the US dollar will usher in the turning point in 2017. Is this view reliable? Before we can answer, we still have to carefully examine the relevant data from the beginning of 2016 to the present.
In the previous article, the author repeatedly emphasized that the trend of the RMB exchange rate in 2016 was completely different in the first half of the year, showing a pattern of “asymmetric depreciation”. In the first half of 2016, the exchange rate of the RMB against the US dollar was generally stable, but the exchange rate of the three major currency baskets continued to depreciate. In the second half of 2016, the RMB exchange rate against the US dollar was significantly depreciated, but the exchange rate of the three major currency baskets was generally stable.
This pattern of "asymmetry devaluation" is actually closely related to the strength of the US dollar exchange rate. In fact, in the first half of 2016, the US dollar index continued to weaken in the volatility. In the second half of 2016, the US dollar index was significantly stronger in the volatility. Especially after Trump took office, the dollar index has increased significantly.
This means that in 2016, when the dollar itself weakened, the renminbi chose to focus on the dollar and depreciated against the currency basket. Conversely, when the dollar itself strengthens, the renminbi chooses to focus on the currency basket and depreciates significantly against the dollar.
The reason for this "asymmetry devaluation" pattern, the author believes that one possibility is that the People's Bank of China believes that the base of the RMB against the CFETS currency basket may be set too high, significantly deviating from the "reasonable equilibrium of the renminbi." "Level", so in the use of the dollar's own weak time window to eliminate the overvaluation of the exchange rate of the RMB against the basket currency. Perhaps the current exchange rate index of 94-96 is considered by the central bank to be a more reasonable and balanced level.
If this speculation is reasonable, then an event window to test this speculation is that when the US dollar index weakens again, the exchange rate of the RMB against the currency basket will remain stable, or it will depreciate again. If it is the former, this indicates that the central bank has a strong willingness to maintain the stability of the RMB exchange rate against the basket at the current level. If it is the latter, this indicates that the central bank still feels that the RMB exchange rate against the basket may be overvalued.
Let us now examine the exchange rate movement since January 2017. The central parity of the RMB against the US dollar in 2017 is roughly an inverted V type, that is, the exchange rate of the RMB against the US dollar is generally in the appreciation period from January to January 24 (from 6.94 to 6.83), while on January 24 From the day of March to March 7, it is roughly in a state of fluctuating depreciation (Figure 1). The RMB-CFETS currency basket exchange rate index is also roughly divided into two stages. From January 6 to February 3 this week, the RMB against the CFETS index depreciated significantly (from 95.25 to 94.03), and on February 3 From the week of March to March 3, the RMB against the CFETS index is basically in a state of consolidation (Figure 2). Finally, let's look at the trend of the dollar index. From the beginning of 2017 to January 31, the US dollar index fluctuated significantly, from 103.2 to 99.5. From January 31 to March 6, the US dollar index fluctuated significantly, rising from 99.5 to 101.6 (Figure 3). It is not difficult to see from the data that the trend of the RMB exchange rate from the beginning of January to the beginning of March 2017 just reproduces the trend of the RMB exchange rate for the whole year of 2016. In January 2017, when the US dollar index weakened, the RMB exchange rate against the US dollar strengthened (the first half of 2016 was the first increase), and the RMB exchange rate against the basket weakened; from the beginning of February 2017 to the present, when the US dollar index regained strength The exchange rate of the RMB against the US dollar was significantly weaker, and the exchange rate of the RMB against the basket was basically stable. The RMB exchange rate movement still does not get rid of the "asymmetric depreciation".
What does this show? First, the bilateral exchange rate movement of the RMB against the US dollar from 2017 to the present still depends to a large extent on the trend of the US dollar index. If the US dollar index continues to strengthen in 2017, the continued depreciation of the RMB against the US dollar is still the general trend. From the current point of view, the Fed’s interest rate hike in March seems to be a foregone conclusion. At least in the first half of 2017, the Fed’s rate hike will probably be the dominant expectation in the market. Under this pattern, the renminbi will still be a high probability event when it breaks 7 in 2017. Second, under the "asymmetric devaluation" pattern, the strategy of selling the renminbi to buy the US dollar is still a strategy of winning a lot. Therefore, Although the central bank has significantly tightened its control over capital flows, the short-term capital outflows are still difficult to reverse in 2017.

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