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as the rmb continues to appreciate against the us dollar, how the possible "exchange settlement effect" will continue to drive the rmb in the future has become a topic of greatest concern to a number of international investment banks.

as of august 30, the rmb exchange rate broke through 7.1, with usd/rmb closing at 7.09 and usd/offshore rmb at 7.0905, representing a cumulative increase of nearly 2,300 points from the year's low. recently, international investment banks such as goldman sachs, jpmorgan chase, barclays, and bnp paribas have turned their attention to the behavioral changes of chinese exporters who hoard us dollars.

how much excess foreign exchange assets are exporters hoarding?

in the past two years, due to the appreciation of the us dollar and the large interest rate gap between china and the united states, most exporters have retained their foreign exchange income in the form of us dollar deposits rather than converting them into rmb, which has also increased the pressure on the rmb to some extent. however, recent reports have said that chinese exporters may convert half of their us$2 trillion in foreign exchange assets into rmb assets, which may lead to an appreciation of the rmb against the us dollar by as much as 10% against the us dollar in the context of the federal reserve's expected interest rate cuts.

goldman sachs' latest report believes that this estimate may exaggerate the risk of rmb appreciation due to the reversal of us dollar hoarding for two reasons - first, the scale of us dollars hoarded by exporters from mid-2022 to 2024 is much smaller, about us$400 billion; second, given that the expected interest rate differential between china and the united states remains large and domestic sentiment remains weak, us dollar assets remain attractive. it is estimated that the average cost of "excess" us dollars accumulated by exporters is slightly lower than 7.1, but the speed of rmb appreciation affects exporters' decision whether to convert foreign exchange more than a specific level.

specifically, the agency defines the overall settlement rate as the percentage of net foreign exchange inflows to the goods trade surplus. the decline in the settlement rate reflects the increase in net foreign exchange assets held by exporters. when the arbitrage returns of the us dollar against the rmb improve, exporters tend to convert less us dollar income into rmb, especially after the us-china interest rate differential turns positive in june 2022.

from 2019 to 2021, the average exchange rate was 45%, but it dropped to 24% from mid-2022 to july 2024. the decline in the exchange rate is generally seen as a sign of exporters hoarding dollars. this means that exporters have hoarded about $400 billion in "excess" foreign exchange assets, far less than the $2 trillion mentioned above.

data obtained by reporters from major institutions show that the current estimates of the amount of excess foreign exchange hoarded by exporters by mainstream institutions are all below us$500 billion. at the same time, institutions estimate that the average cost of the "excess" dollars hoarded by exporters is slightly lower than 7.1.

for example, barclays estimates that chinese exporters hold about $500 billion, and if the usd/cnh continues to weaken below 7.1, the firm expects that up to $100 billion to $200 billion of that could be swapped into rmb.

"in the past two years, chinese exporters have not sold their dollar income. unlike companies in south korea or taiwan, which convert foreign exchange into rmb when the exchange rate is high (above 1,380 won per dollar and above 32.8 new taiwan dollars per dollar), these exporters' pessimistic sentiment towards the renminbi has caused them to hold us dollars," barclays foreign exchange and interest rate strategist zhang meng told reporters.

according to china's foreign exchange settlement and transaction data, the ratio of net foreign exchange settlement (on behalf of customers) by banks to china's annual merchandise trade surplus averaged 0.29 between 2020 and 2022, but fell to -0.17 in the first half of 2023. assuming that this "missing" settlement flow is mainly driven by exporters retaining us dollars, it is estimated that exporters have held about us$538 billion since 2023. at the same time, according to the ratio of foreign exchange derivative transactions to the total of spot foreign exchange transactions announced by the state administration of foreign exchange, the foreign exchange hedging ratio of chinese companies averaged 27.1% in the first half of 2024. although this ratio is slightly higher than 24.2% in 2023 and 25.8% in 2022, it is still relatively low overall, indicating that exporters are more vulnerable to large foreign exchange fluctuations.

potential "exchange settlement effect" will continue to support the rmb

although the actual amount of foreign exchange asset hoarding has not reached the trillion-dollar level, the potential "exchange settlement effect" cannot be ignored.

bnp paribas believes that china's exports have performed well in recent years, but exporters have been reluctant to convert their foreign exchange earnings into rmb. "we believe that they expect the rmb to depreciate further so that they can maximize profits at the time of settlement. the recent rapid appreciation of the yen and the rmb may prompt exporters to start selling when the rmb falls. in particular, the recent depreciation of the rmb central parity rate by the people's bank of china is not to depreciate the rmb, but to reintroduce market forces."

jpmorgan chase estimates that the total amount of unconverted u.s. dollars held by chinese companies has reached between 300 billion and 600 billion u.s. dollars. once the u.s. dollar interest rate cuts and the exchange rate falls, these companies may concentrate on converting foreign currency, which may have a significant impact on the market.

goldman sachs mentioned that considering that the average cost of the "excess" dollars hoarded by exporters is expected to be slightly lower than 7.1, this also explains why investors are so concerned about the exchange rate level of 7.1. "in our view, the speed of rmb appreciation has a greater impact on exporters' decision to settle foreign exchange than a specific 'level'... the continuous feedback from companies is that they will only sell dollars when the carry situation changes or they are convinced that the us dollar is on a downward trend."

china business news also recently reported that the head of financial market business of a foreign trade company mentioned to reporters: "according to our understanding, not many export companies have settled foreign exchange recently, and most of them have not yet come out. the previous wave has been missed. during this period, it is mainly the banks' proprietary trading that is doing it."

as of the evening of august 30, the usd/cny exchange rate had fallen below the 7.1 mark, and the usd/offshore cny exchange rate even traded in the range of 7.07 to 7.08.

"the daily chart of the usd/offshore rmb shows that the currency pair closed at its lowest point since may 2023 last thursday (august 29). even as the usd fell sharply against the rmb, there were still no buyers to take over in large quantities. it seems that the rmb is expected to remain strong," david scutt, senior strategist at fxcm, told reporters.

in the short term, he believes that there is almost no visible technical resistance before the usd/cny reaches 7.01265. "if there is a sustained and substantial downward break of 7.08, it is not ruled out that prices may fall sharply and hit the 7 mark."

markets may be over-pricing the fed's rate cuts

however, a considerable number of institutions are still taking a wait-and-see attitude towards the prospects of the rmb. on the one hand, the market's pricing of the fed's interest rate cut is too aggressive in the short term; on the other hand, the recovery of china's economic fundamentals still needs time.

eric robertsen, global chief strategist at standard chartered, told reporters that the fed's september rate cut is a foregone conclusion, and market pricing shows that the cumulative rate cut will be 225bp, and the interest rate is expected to bottom out in the second quarter of 2026. this is a rate cut pricing close to a "hard landing", but with u.s. treasury yields falling to a 15-month low and u.s. stocks close to historical highs, a soft landing has become the mainstream view in the market. although there is a consensus among institutions that there are still downside risks to global economic growth, especially in the eurozone.

scott also mentioned that according to federal funds futures, the market has factored in the risk of a recession or hard landing, and expects the next three interest rate meetings to cut interest rates by more than 100bp, which means the fed will cut interest rates by 50bp at least once this year, and there is a small chance of a second 50bp cut. "but we believe that if the employment data is not too bad, the interest rate cut cycle is more likely to start with 25bp in september, and the remaining two meetings this year will also cut interest rates. we expect the fed may have more than 150bp of room to cut interest rates."

goldman sachs believes that the recent appreciation of the rmb against the us dollar is mainly driven by external factors, especially the market's expectations of changes in the fed's interest rate cuts and the impact of the us election. in the coming months, external factors may still be the main driving factor. several macro catalysts that may affect the rmb exchange rate include: us august non-farm payrolls data (september 6), the first presidential debate of the us election (september 10) and the september fed interest rate meeting (september 18). factors supporting the decline of usd/rmb include a weaker-than-expected us job market, faster interest rate cuts by the fed, and a decline in the probability of trump's election in market pricing.

in the medium term, goldman sachs expects the rmb to underperform the currencies of its major trading partners as the fundamentals of china's economic growth still need to recover.

"the countercyclical factor has narrowed sharply in the past two weeks, suggesting that the people's bank of china does not seem to support further appreciation of the rmb. there are also reports that regulators have investigated the impact of a stronger rmb on exporters. we believe that the rmb remains a good financing currency for carry trades. even with the federal reserve's expected rate cuts in the coming years, the interest rate differential between china and the united states will remain significantly positive. a depreciation of the rmb against the cfets basket of currencies will increase the share of chinese-made goods in the global market. against the backdrop of still-tense trade tensions, policymakers may allow the rmb to weaken further moderately," said goldman sachs.