20220915-招银国际-Macro_Insights_RMB_exchange_rate_cycles__causes,_implications___spillovers_19页_1mb

RMB Exchange Rate Summary

Core Content

The document provides an in-depth analysis of the RMB exchange rate cycles, the influencing factors, the exchange rate regime, and the spillover effects of the RMB against the US dollar. It also includes forecasting scenarios for the US$/RMB rate in 2023.

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Main Viewpoints

• RMB Exchange Rate Regime:
  China operates under a managed floating regime with flexibility and careful management. The PBOC avoids direct interventions using FX reserves, but still manages the exchange rate through central parity rate, verbal intervention, RRR adjustments, and window guidance. The regime is characterized by low volatility and a cautious approach to prevent herding behavior and overshooting risks.

• Factors Influencing US$/RMB Rates:
  The exchange rate is influenced by:

  • Investor appetite: When China's economy outperforms the US, demand for RMB assets increases, leading to decline in US$/RMB rates.
  • Economic & policy divergence: The US-Sino interest spreads and monetary policy differences affect the exchange rate.
  • Geopolitical risk: Increased geopolitical risk related to China may lead to rise in US$/RMB rates.
  • Balance of Payments (BOP): BOP transactions, particularly financial account flows, have a significant impact on the exchange rate, especially in the short term.

• Historical Cycles (2014–2021):

  • First cycle (2014–2018): US$/RMB rate increased by over 15% due to China's economic slowdown and Fed tightening.
  • Second cycle (2018–2021): US$/RMB rate rose by nearly 15% due to the US-China trade war and Fed rate hikes. It then declined as China recovered quickly and the Fed adopted a super-loosening policy.

• US$/RMB Rate Forecast:

  • The RMB experienced a new depreciation cycle in 2022 due to the Russia-Ukraine war, Fed tightening, and China's economic slowdown.
  • The US$/RMB rate is expected to rise in the next 1–2 quarters, with a potential peak of 7.1 by the end of 2022.
  • In 2023, the trend may shift depending on the US recession and China's economic reopening. The rate could decline to 6.75 by the end of the year.

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Key Information

Exchange Rate Regime Characteristics

• No direct FX reserve interventions.
• Low volatility (3–5% annualized) due to careful management.
• Managed floating with reference to a basket of currencies, but US$/RMB remains the most significant factor.
• Long-term goal: More flexibility in the RMB exchange rate.
• Short-term concern: Avoiding instability and capital outflows.

Influencing Factors

Factor	Impact on US$/RMB Rate
China's economic growth > US	Decline in US$/RMB rate
China's economic growth < US	Increase in US$/RMB rate
Geopolitical risk (e.g., China)	Increase in US$/RMB rate
BOP transactions (especially financial)	Strong short-term influence

Forecasting Scenarios for 2023

Scenario	US GDP Growth	China GDP Growth	3M Shibor-Libor Spreads	US$/RMB (Average)
S1	1.5%	6.0%	-0.8%	7.16
S2	1.5%	5.0%	-1.0%	7.20
S3	1.5%	4.0%	-1.3%	7.25
S4	0.5%	6.0%	0.3%	6.99
S5	0.5%	5.0%	0.0%	7.03
S6	0.5%	4.0%	-0.3%	7.08
S7	-0.5%	6.0%	1.8%	6.74
S8	-0.5%	5.0%	1.5%	6.78
S9	-0.5%	4.0%	1.3%	6.82

Spillover Effects

• The US$/RMB rate has significant spillover effects on:
  • Chinese stock returns (especially in material, industrials, consumer discretionary, financials, and air transportation sectors).
  • Emerging Market (EM) exchange rates and stock returns.
  • Commodities sensitive to the "China" factor.

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Conclusion

The RMB exchange rate is shaped by a combination of economic fundamentals, policy divergence, investor sentiment, and geopolitical risk. The PBOC's approach is to maintain flexibility in the long run while avoiding instability in the short run. The US$/RMB rate is expected to rise in the next 1–2 quarters, but a potential decline in 2023 is possible if the US economy slows and China reopens. The rate also has notable spillover effects on global financial markets, particularly Chinese and EM assets.