Since late May 2020, the spot exchange rate of RMB against the US dollar has continued to appreciate from around 7.2, and has now risen to around 6.5. The largest increase in the RMB against the US dollar in seven months has exceeded 10%. (CNY rose from 7.1765 to 6.5192), which is in strong contrast to the continued depreciation of the spot exchange rate of RMB against the US dollar in the first five months of 2020. In the first five months of 2020, the maximum depreciation of RMB against the US dollar was nearly 4.7% (CNY depreciated from 6.8398 to 7.1765). As a result, in 2020, under the influence of the impact of the epidemic and the resumption of work after the epidemic, the RMB exchange rate showed a “√”-shaped trend throughout the year.
So as China’s economy returns from the epidemic in 2021, how will the RMB exchange rate behave? To this end, we start from the persistence of the main factors driving the drastic changes in the exchange rate in 2020, and give a subjective outlook on the trend of the RMB exchange rate in 2021.
First of all, since the second quarter of 2020, the speed, magnitude and sustainability of China’s economic recovery from the epidemic have been good. In other major economies, it played a decisive role in the strengthening of the RMB exchange rate. Especially since late May, the trend of China’s economy taking the lead in recovery has continued to be confirmed, providing continued support for the strengthening of the exchange rate.
But as we predicted in “China’s Macroeconomic Outlook in 2021: After a sharp rise and a fall, moving closer to normalcy”, after the second quarter of 2021, the post-epidemic rebound effect will quickly fade. , China’s GDP quarter-on-quarter growth rate will gradually fall from the current level of more than 2% to 1%, and the year-on-year growth rate will return to the 5-6% level. Correspondingly, the growth rate difference between China’s economy and other economies will also fall; in addition, support One of the factors behind China’s rapid economic recovery is the recurrence of overseas epidemics, which not only promoted the export of China’s epidemic prevention materials, but also strengthened China’s production substitution effect (overseas production capacity was periodically moved to China due to the impact of the epidemic). Therefore, in 2020 In the first three quarters, net exports contributed more to economic growth than final consumption, which is the first time in history. This is also an important reason why exchange rate appreciation did not have a significant impact on China’s exports in 2020.
Thus, whether the rapid growth of exports in 2021 can be sustained will be coupled with the decline in economic growth. , have weakened the support of the strong exchange rate from economic fundamentals to a certain extent, thereby causing the exchange rate to face uncertainty. We predict that this variable may appear in the second half of 2021.
Secondly, the widening of domestic and foreign interest rate differentials has also provided support for the strengthening of the exchange rate. At present, China’s monetary policy is still in a normal space, but most major developed economies have entered a policy environment of zero interest rates, negative interest rates, and quantitative easing. In addition, after the epidemic in China stabilized, market interest rates began to rise as market sentiment improved, driving domestic and foreign interest rates. The gap widened significantly. For example, the current interest rate spread between China and the United States’ 10-year treasury bonds has risen from 100 Bps before the epidemic to more than 250 Bps, a record high.
A special point to note here is that before 2018, the actual correlation between the trend of the RMB exchange rate and the domestic and foreign interest rate differentials It is not significant, but since 2018, as we accelerate the opening up of the financial sector, the attractiveness of RMB assets to international investors has continued to increase, and the positive correlation between domestic and overseas interest rate differentials and the RMB exchange rate has also been enhanced.
However, since August 2020, the prices of metals, energy and other commodities have continued to rise, and have driven feed, Market expectations for rising food and other prices have increased, coupled with economic recovery and other factors, we cannot rule out a larger-than-expected recovery in global inflation in 2021. We predict that the CPI increase in the United States will rise to at least above 2% in 2021, or even close to 3%, which will in turn drive U.S. interest rates will also rise. For example, the U.S. 10-year Treasury bond interest rate will rise to at least 1.5% in 2021 (currently around 0.9%). Then the narrowing of domestic and foreign interest rate differentials will inevitably have an impact on the exchange rate.
Third, the U.S. dollar index has continued to fall since the high of 103 in mid-March 2020. It has now fallen below the 90 mark, with a cumulative decline of nearly 13%. Under the spillover impact of the weak U.S. dollar Under this situation, non-US currencies, including the RMB, will naturally have a basis for strengthening.
However, since the consumption resilience of the United States in 2020 has been maintained under stimulus policies, there is a high probability that the U.S. service industry will decline in 2021 It will continue to recover, and consumption can still be supported by policy support. Accordingly, the US dollar index will be more susceptible to the improvement of the US economy in the second half of 2021. The probability of a phased rebound is not very low, and the exchange rate of non-US currencies will accordingly be affected. Create spillover effects.
Finally, China and the United StatesThe phased easing of economic and trade tensions is also an important factor supporting the strengthening of the RMB exchange rate in 2020. Since the Sino-US tariff war in 2018, tensions in bilateral relations have tended to increase the depreciation pressure on the RMB exchange rate. Since 2020, with the implementation and implementation of the Sino-US economic and trade agreement, coupled with the impact of short-term factors such as the election within the United States, Sino-US relations have emerged. Staged relaxation. However, the actual progress of China’s commitment to purchase additional U.S. goods is slower than the scheduled progress (as of the end of November 2020, China’s actual purchase progress was 58%, of which 76% was for agricultural products, 58% for finished products, and 35% for energy products. %), the Biden administration’s attitude towards the agreement in 2021, as well as the actual completion of the US$200 billion additional purchase plan within two years required by the agreement itself, are facing uncertainty.
To sum up the above four points, our outlook for the RMB exchange rate in 2021 is that the factors supporting the exchange rate will still exist in 2021, but the variables will increase in the second half of the year, and the fluctuation range of the RMB exchange rate against the US dollar throughout the year will be is [6.2, 6.8].
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