RMB exchange rate hits six-month high

International Business News  –  China’s RMB is turning up in value. It hit a six-month high against the dollar on Jan. 16. This is due to the fact that the US interest rate differential between China and the US is narrowing as the US slows down its rate hikes. In addition, a return of foreign investors’ willingness to invest in Chinese risk assets will also drive RMB appreciation. In a marked change from 2022, which saw the biggest annual decline since 1994, expectations for appreciation in 2023 are strengthening.

At one point in the Shanghai foreign exchange market on Jan. 16, the RMB appreciated to 6.6896 yuan per dollar, a new high since July 5, 2022.

The RMB exchange rate depreciated to 7.328 yuan per dollar in November last year, the lowest point in about 15 years, after the party congress closed. The main reason for the previous sell-off in RMB’s appreciation is the narrowing interest rate differential between the U.S. and China, according to Refinitiv data, which shows that the U.S. 10-year Treasury yield was about 4.2 percent as of Nov. 7 last year, 1.515 percent higher than China’s 10-year Treasury yield. That rate differential narrowed to 0.578 percent as of Jan. 13. The perception that the pace of U.S. rate hikes is slowing has strengthened. On the other hand, China saw expectations of an early economic restart and Treasury yields rose to around 3 percent at one point. U.S. Treasuries have become relatively less attractive in terms of yield.

The RMB depreciated 8.32% against the USD for 2022 as a whole, the largest decline since China’s exchange rate reform in 1994. On the other hand, voices arguing for appreciation in 2023 are increasing. UBS raised its yuan exchange rate to 6.6 yuan per dollar at the end of March from a previous estimate of 6.9 yuan per dollar, and to 6.5 yuan at the end of December from 6.7 yuan. UBS said, “China’s economy restarted earlier than expected and the improved perception of Chinese growth has stimulated capital inflows into risky assets.”

In addition to the removal of strict preventive measures that had become an economic burden, there has been a shift in support for real estate and huge IT (information technology) companies. The Chinese government has proposed guidelines to relax the “three red lines” financial targets set for large real estate companies, etc. The perception of short-term benefits to the Chinese economy is increasing.

In the stock market, foreign investors are increasing their investment in stocks. Foreign investors are expected to buy A-shares through the Shanghai-Shenzhen-Hong Kong Stock Connect for the third consecutive month as of January. It has become a factor to push up the RMB exchange rate through capital inflows.

The Chinese government is taking a wait-and-see approach to the rapid rebound of the yuan. The People’s Bank of China (PBOC) Deputy Governor Xuan Changneng argued at a press conference on January 13, 2022 that the perception that the U.S. Federal Reserve (FRB) is slowing down its rate hikes since November strengthens and the yuan turns to an appreciation trend against the U.S. dollar, saying on this basis, “Maintain the basic stability of the yuan exchange rate at a reasonable equilibrium level ”, expressing a calm attitude. This is because although the yuan is appreciating, it is still significantly lower than the high set in 2014 (6.0406 yuan to the dollar) and will still not hit the export industry.