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driven by multiple favorable factors, the offshore rmb exchange rate rose above the 7.0 mark at 8:00 on september 25, reaching a low of 6.9963.

many institutional personnel interviewed believe that after the federal reserve’s interest rate cut, coupled with favorable domestic policies, the market’s expectations for rmb appreciation have increased, while also driving the demand for foreign exchange settlement, thereby once again pushing the offshore rmb to break through the 7 mark.

on september 25, mingming, chief economist of citic securities, told cailianshe that after the federal reserve cut interest rates, coupled with the recent introduction of a package of domestic policies and the positive expectations for domestic economic recovery, the offshore rmb has appreciated steadily this round and broken through the 7 mark.

according to conservative estimates by citic capital, the amount of foreign exchange that has not yet been converted overseas in the past two years may be around us$500 billion. if the renminbi continues to appreciate in the future amidst the backdrop of a possible weakening of the us dollar amid interest rate hikes, the amount of foreign exchange conversion may further boost the appreciation.

however, soochow securities analyst tao chuan previously predicted that if the need to increase monetary policy easing in the second half of the year increases, the pressure on the renminbi to depreciate in the second half of the year may also increase.

wind data shows that in the past four years, the offshore rmb has broken through 7 in both directions many times, such as on july 8, 2020, december 5, 2022 and september 25, 2024, and fell below the 7.0 mark on september 15, 2022 and may 17, 2023.

tao chuan predicted at the end of last year that the basic rhythm of the rmb exchange rate in 2024 will be: a slight appreciation in the first quarter, weakening in the second quarter due to repeated expectations of the fed's interest rate cuts and seasonal factors, and a fluctuating appreciation in the third quarter as the fed's interest rate cuts are implemented and the people's bank of china follows suit, and appreciation again in the fourth quarter due to policy tasks and seasonal factors.

as the us dollar index falls, will the rmb passively appreciate?

a report released by boc securities on september 23rd stated that since august 23rd, when powell set the tone for interest rate cuts at the jackson hole global central bank annual meeting, the u.s. dollar index has continued its downward trend from last month, with the decline widening from 1.7% last month to 2.2%.

against this backdrop, major global currencies appreciated passively. for example, the euro appreciated by 2.2% in total; the yen appreciated at a significantly slower pace, with the increase narrowing from 7.3% last month to 2.6%; the rest of the british pound, canadian dollar, swedish krona and swiss franc appreciated to varying degrees.

domestically, expectations of an easing policy by the federal reserve have further eased the pressure on the rmb exchange rate adjustment.

data shows that this round of appreciation started on july 25, and the appreciation speed accelerated in august. in the first half of august, the rmb exchange rate in china fluctuated in a narrow range of 7.13-7.15; on august 29 and 30, it suddenly rose and closed at 7.0881, entering the 7.0 era.

for the whole month, the rmb exchange rate central parity rate appreciated by 0.3%. in the first eight months, the cumulative decline of the central parity rate dropped from the previous value of 0.7% to 0.4%, while the onshore spot exchange rate appreciated by 0.06%, recovering the lost ground since the beginning of the year.

citic capital analyzed that this round of appreciation may not be due to the passive influence of the us dollar. at the same time, there is no data to verify the marginal improvement of the domestic fundamentals. on the contrary, there is still great downward pressure in the short term.

considering the interest rate differential between china and the united states, although the interest rate differential in august narrowed compared with july, supporting the strengthening of the rmb, the interest rate differential remained relatively stable in the last week of august. citic capital believes that the core reason for the appreciation of the rmb can only be attributed to the rapid increase in expectations for foreign exchange settlement.

the $500 billion foreign exchange settlement volume is coming later

a report by citic capital shows that since 2022, the central value of the difference between foreign exchange settlement and sales on behalf of customers by downstream banks due to goods trade has gradually declined, and the difference between the trade surplus and the difference between foreign exchange settlement and sales has increased.

researcher liu boyang believes that this shows that exporters have indeed retained foreign exchange overseas against the backdrop of the continuous depreciation of the rmb and the widening interest rate gap between china and the united states over the past two years, and it cannot be denied that companies going overseas in recent years is also one of the reasons for retaining foreign exchange.

based on this, liu boyang believes that the scale of foreign exchange that has not yet been converted overseas in the past two years may be around us$500 billion. if the renminbi continues to appreciate in the future against the backdrop of a possible weakening of the us dollar amid interest rate hikes, the amount of foreign exchange conversion may further boost the appreciation rate.

so does appreciation have any impact on exports?

boc securities believes that this round of rmb exchange rate appreciation will have little impact on export competitiveness.

the chart in the report shows that although the rmb appreciated against the us dollar, the rmb continued to fall against the multilateral exchange rate index in august. the cfets rmb exchange rate index and the rmb exchange rate index based on the bis and sdr currency baskets fell by 1.3%, 1.6% and 1.0%, respectively, an increase of 0.5, 0.7 and 0.01 percentage points from the previous month.

however, guan tao, chief economist of boc securities, reminded that export companies should still pay attention to the impact of exchange rates on their financial conditions.

boc securities found that the average spot exchange rates in august, which lagged by three months and five months, ended the previous months of continuous decline, rising by 1.1% and 0.7% respectively. this means that if export companies do not hedge exchange rate risks, they will suffer exchange losses caused by the recent rmb exchange rate rebound. the appreciation of the rmb will have a greater impact on companies with shorter export payment terms.

however, tao chuan believes that the biggest uncertainty in the exchange rate in 2024 lies in how strong the demand for the "policy bottom" is. if the exchange rate appreciates sharply in the first half of the year, the momentum of economic recovery may be significantly weakened, resulting in damaged market confidence and an increased need for greater easing in the second half of the year, which in turn increases the pressure on the depreciation of the rmb in the second half of the year.