context: While exports started to lose steam in August 2022, imports have stagnated for months due to disrupted production and sliding consumer confidence under strict pandemic control measures. A weaker RMB will likely further discourage imports of raw materials, commodities and consumer goods.
The offshore RMB/USD exchange rate went above the critical threshold of 7 on 15 Sep 2022 and the onshore exchange rate did the same a day after. It was the first time since July 2020 and the second time in the past decade that the RMB/USD exchange rate breached 7. Nevertheless, it has not caused panic or triggered a greater capital exodus in the foreign exchange market.
Wang Yongli 王永利 China International Futures CEO and Zhao Wei 赵伟 Sinolink Securities chief economist explained that the main factors calming the forex market amid rapid RMB depreciation are
- a bullish US dollar index continues to impose downward pressure on the RMB, but the Chinese currency has stayed strong relative to a basket of other major international currencies
- a large PRC trade surplus continues to provide a cushion for RMB volatilities
- strong export growth over the past year has resulted in the accumulation of $911.2 bn in foreign exchange deposits at banks by the end of August 2022; increasing demand for RMB settlement of foreign exchange (selling USD and buying RMB) from Chinese traders will help beef up the RMB exchange rate
- thanks to advanced policy guidance from the PBoC (People’s Bank of China) and SAFE (State Administration of Foreign Exchange), trading firms have been more risk-savvy in leveraging financial tools to hedge against forex volatilities, such as foreign exchange forward and swap
- speculative capital outflows from the bond and securities markets have reached a total of $57.9 bn from Feb-Jun 2022 but the outflows have slowed down since July 2022
- the PBoC has refrained from direct foreign exchange intervention using forex reserves and allowed more accumulation of foreign exchange at private firms, financial institutions and individual accounts; it has used monetary tools such as lowering the forex deposit requirement ratio to manage RMB fluctuations
Despite growing foreign exchange resilience, Wang warned of potential shocks to the gradual economic recovery induced by the COVID-19 resurgence and further lockdowns across the country. In addition, slowing export growth and further hikes in US interest rates will continue to pressure the RMB.