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Economic Observer reporter Hu Yanming "The exchange rate rose from 7.24 to 7.18, and today it is around 7.14. I did nothing and lost nearly 10,000 yuan." On August 5, Mr. Zhao, who is engaged in small commodity export business in Zhejiang, told the Economic Observer that he regretted not converting the currency earlier.

In late July, Mr. Zhao received a payment of 100,000 US dollars for goods. Before he had time to convert the currency into RMB at the bank, the RMB exchange rate against the US dollar suddenly appreciated, and the amount of RMB he could exchange dropped from 724,000 yuan to around 714,000 yuan.

In this round of global financial market fluctuations, the RMB exchange rate has risen sharply. From July 24 to August 5, the onshore RMB exchange rate against the US dollar fell from 7.2776 to 7.1385, returning to the level at the beginning of the year; the offshore RMB exchange rate against the US dollar fell from 7.2916 to 7.1375.

This round of RMB exchange rate "sharp rise" caught many foreign trade enterprises off guard. Since the beginning of this year, the RMB exchange rate has been relatively weak, and the depreciation of the exchange rate has brought many benefits to export enterprises. Li Shuai, who is engaged in the processing of mechanical parts in Shenzhen, said that the depreciation of the RMB exchange rate since the beginning of this year has made export business relatively easier to do. In the face of the sharp rise in the RMB exchange rate, he chose not to settle the exchange for the time being, and kept the customer's US dollar payment in the account first, waiting for the right price to convert it into RMB.

Since August 6, the appreciation momentum of the RMB exchange rate has eased. The onshore RMB exchange rate against the US dollar fluctuates between 7.14 and 7.18.UBSWang Tao, head of Asian economic research and chief China economist, believes that if market expectations for U.S. economic growth and interest rate cuts shift again, or data show that China's economic growth faces more downside risks, the renminbi may face depreciation pressure again.

Wang Tao said that given that UBS's US economic team believes that the US economic growth will slow down but will not fall into recession, the Federal Reserve will cut interest rates for the first time in September this year, and we expect that the Chinese economy is expected to stabilize on a quarter-on-quarter basis in the next few quarters, and maintain the current forecast that the RMB exchange rate against the US dollar will be 7.10-7.20 by the end of the year.

Strong rebound

Since 2024, the RMB exchange rate against the US dollar has shown a weak trend, and remained at around 7.3 in early July. However, since July 24, the RMB exchange rate has appreciated significantly. On July 25, the onshore RMB exchange rate against the US dollar and the offshore RMB exchange rate against the US dollar were reported at 7.2360 and 7.2403 respectively; on August 2, the onshore RMB exchange rate against the US dollar rose above the 7.20 mark.

On August 5, the RMB exchange rate continued to soar, with the onshore RMB exchange rate against the US dollar approaching the 7.11 mark and the offshore RMB exchange rate once rising above the 7.10 mark.

In just a few trading days, the RMB exchange rate almost "recovered lost ground" and returned to the level at the beginning of 2024. For the whole year of 2023, the average RMB exchange rate was 7.0467 RMB per U.S. dollar, a depreciation of 4.5% from 2022.

This round of RMB "sharp rise" also caught many export businesses off guard. Mr. Zhao said that when the bank's exchange rate was 7.24, he wanted to wait because the US dollar has always been strong and sometimes it can be exchanged for 7.27 RMB, but he didn't expect the price to drop as he waited.

Mr. Zhao had to bear the exchange loss because he needed funds to pay downstream suppliers. Small merchants like Mr. Zhao who are engaged in exports and have relatively low profit margins are more vulnerable to foreign exchange fluctuations. Under drastic fluctuations in exchange rates, foreign exchange losses may even offset product profits.

Li Shuai's company is relatively larger, and it also has domestic business. Export business accounts for about half of its operating income, so the time requirement for converting US dollars into US dollars is not so urgent. So he chose not to convert US dollars into US dollars for the time being and observe the recent exchange rate trend. However, the payment cycle of customers and the fluctuation of exchange rates will inevitably affect the profits of enterprises.

The appreciation of the RMB is good for import companies, overseas students and other groups. The same RMB can be exchanged for more US dollars. The recent appreciation of the RMB made Ms. Cui, who is studying in New York, feel "heartbroken". On June 14, she exchanged 21,800 RMB for 3,000 US dollars. The exchange rate at that time was about 7.27, and according to the current exchange rate, she can save 400 RMB. She doesn't know how long the appreciation of the RMB can last, and is also waiting to see whether to exchange more US dollars.

Multiple factors drive

Judging from the trend of the RMB exchange rate in recent years, the RMB has generally experienced four rounds of downward cycles since 2015, from August 2015 to the end of 2016, from 2018 to May 2020, from March to October 2022, and from February 2023 to the present. The influencing factors are different each time.

The depreciation of the exchange rate this year has made Li Shuai feel that the company's products will have a price advantage when competing with foreign counterparts. But he also said that some foreign customers are also very smart now. In order to avoid exchange rate fluctuations, they will negotiate and finalize the price in RMB.

Li Shuai and other people engaged in foreign trade business are paying attention to why the RMB exchange rate has risen this time and what trend it will show in the future.

Many analysts pointed out that the combined effect of multiple factors has driven the sharp rise in the RMB exchange rate.Bank of ChinaWang Youxin, a senior researcher at the institute, said that as one of the financial markets most sensitive to price changes, the rapid changes in the RMB exchange rate fully demonstrate that the current global economic and financial markets are facing an important turning point.

Wang Youxin believes that from technical corrections to the decline of the US dollar index, to the strong appreciation of the yen, and changes in the global economic, financial and monetary policy environment, the combination of many factors has had a positive impact on the RMB exchange rate, supporting the strong rebound of the RMB exchange rate.

Zhong Zhengsheng, chief economist of Ping An Securities, pointed out that there are three macroeconomic foundations for the sharp appreciation of the RMB: first, the US dollar index fell, but the RMB exchange rate did not rise accordingly, accumulating the potential for "catch-up"; second, the domestic stable growth policy was strengthened; third, the trade surplus hit a new high. In addition, the appreciation of the yen was one of the triggering factors for the sharp appreciation of the RMB.

A research report from Ping An Securities pointed out that this round of RMB exchange rate adjustment has little to do with fundamental factors, but is more due to factors at the institutional behavior and trading level. The closing of yen carry trades and the weakening of the US dollar have triggered the closing of some transactions using RMB as a financing currency, leading to a rapid appreciation of the RMB exchange rate. Before the US dollar shows a trend of depreciation and domestic demand does not improve significantly, the exchange rate appreciation caused by the trading level may be difficult to sustain.

Regarding the relationship between the fluctuation of the RMB exchange rate and the trend of the Japanese yen, Zhang Yu, chief macro analyst at Huachuang Securities, said that although the linkage between the RMB and the Japanese yen, both relatively low-interest currencies, has increased significantly since the Fed's rapid rate hike, the RMB cannot fully apply the carry trade logic. The fundamental reason is that the RMB financial account is still open to a limited extent, and the amount of US dollar assets purchased with RMB as a financing currency is actually limited.

Future Trends

On August 6, the central parity rate of RMB against the US dollar was 7.1318, up 27 basis points from the previous trading day. From the beginning of July to August 6, the onshore RMB exchange rate against the US dollar fluctuated and appreciated from 7.27 to around 7.14, an appreciation of 1.79%, and the CFETS RMB exchange rate index fell from 99.76 to 98.95. During the same period, the US dollar index fluctuated and weakened, falling from 105.8 to 102.7, a decline of 2.9%.

A foreign exchange trader told the Economic Observer that he is currently paying attention to two psychological barriers, one is the 7.0 integer barrier, and the other is the previous high of 7.4. "Now the main focus is whether it can break 7.1. At present, it is still maintaining normal operations."

On August 7, the foreign exchange reserve data released by the State Administration of Foreign Exchange showed that as of the end of July 2024, my country's foreign exchange reserves were US$3,256.4 billion, an increase of US$34 billion from the end of June, an increase of 1.06%.

Zheshang SecuritiesChief Economist Li Chao said that foreign exchange reserves are stable above 3.2 trillion US dollars, with a certain safety margin from its empirical warning line of 3 trillion US dollars. As for the exchange rate, the endogenous driving force of domestic economic demand has yet to be restored, and there is not much room for a substantial appreciation. There are many uncertainties in the second half of the year, such as the US election, the Fed's policy rhythm, the evolution of US fundamentals, and fluctuations in overseas capital markets. The RMB exchange rate will fluctuate within a range.

As for the subsequent trend of the RMB exchange rate, Zhang Yu believes that the balance of foreign exchange supply and demand in actual transactions is reflected in the surplus of foreign exchange settlement and sales = trade surplus × net exchange rate. At present, strong exports mean that companies can earn foreign exchange, and the trade surplus forms a "safety cushion" for the exchange rate. Whether it can trend upward depends on whether the net exchange rate changes.

From the perspective of the macro environment, Wang Youxin believes that the RMB will continue to rise in the coming months. The RMB exchange rate is expected to continue to rise steadily under the support of multiple favorable factors such as the continued stable improvement of economic fundamentals, improved market expectations, changes in the international environment and increased cross-border capital flows.

Huaan SecuritiesA research report from the Institute of International Business and Economics pointed out that in the short term, the strengthening of the Fed's interest rate cut expectations has led to a decline in US bond yields, easing the pressure on the depreciation of the RMB; in the medium term, the factors of the previous depreciation of the RMB have yet to be reversed, and it is expected to enter the appreciation channel after the economic recovery accelerates. Whether the GDP growth rate in the second half of the year can rebound to more than 5% is the key to determining the medium-term exchange rate trend. The RMB exchange rate needs more macroeconomic data to enter the medium-term appreciation channel.