On August 8, the offshore RMB exchange rate against the US dollar fell below the 7.21, 7.22, 7.23, 7.24 and 7.25 levels during the session. Wind data shows that as of 22:18, the offshore RMB has fallen by more than 450 points against the US dollar, a decrease of 0.63%, hitting a new low in the past month. In addition, the U.S. dollar index rose significantly and strongly on August 8. Wind data showed that it once climbed from a low of 102.05. As of 22:57, the U.S. dollar index rose 0.58% during the day to 102.67.
Compared with the offshore market, the RMB exchange rate fell less in the onshore market. On August 8, the spot exchange rate of RMB against the US dollar closed at 7.2133 at 16:30, down 213 basis points from the previous trading day. After entering night trading hours, the spot exchange rate of RMB against the US dollar fell below the 7.22 mark.
Reasons for the current round of RMB devaluation
The second wave of RMB depreciation in 2023 has different characteristics from previous fluctuations. In the first three waves of depreciation, the correlation between the RMB exchange rate and the effective exchange rate, the US dollar index, and the US-China interest rate differential was strong. However, in this round of depreciation, the correlation between the RMB exchange rate and these variables has weakened significantly. In addition, the first three waves of depreciation were mainly driven by external factors, so the U.S. dollar index and the U.S.-China interest rate differential were ahead of the fluctuations in the RMB exchange rate against the U.S. dollar; however, in this round of depreciation, internal factors are likely to be the dominant factor.
Important factors leading to the depreciation of the renminbi were China’s poor economic performance in the second quarter, the failure to implement the macroeconomic stimulus policies expected by the market, and weak market sentiment. On the macro front, investment and export growth have declined, deflationary pressure has intensified, and financial indicators have deteriorated; real estate and local government debt problems also exist; externally, the conflict between Russia and Ukraine has deepened, and the game between China and the United States is still ongoing.
Outlook for the RMB exchange rate trend in the second half of the year
From an external perspective, market sentiment is affected by short-term factors, but recent weakness in the U.S. labor market and nominal inflation data has caused the U.S. dollar index to fall. However, the U.S. core inflation data has limited room for decline, and the 10-year U.S. Treasury yield is still consolidating at a high level. Therefore, to stabilize the RMB exchange rate against the US dollar, we need to start from internal factors and cannot rely on a weakening external environment.
From an internal perspective, as the base period effect weakens, the domestic economic trend in the second half of the year largely depends on the direction of macroeconomic policies. The current endogenous recovery momentum of the domestic economy is weak. A series of recent signs indicate that the government is still planning a series of macro policy measures, but the policies introduced so far are relatively scattered and insufficient to boost market confidence. The Third Plenary Session of the 20th Central Committee of the Communist Party of China may be held at the end of this year and a new round of reform and opening up plans will be announced, which is expected to be an important factor affecting expectations.
Based on the above considerations, it is expected that the main factors that will dominate the trend of the RMB exchange rate against the US dollar in the second half of the year will still be internal factors. Under the optimistic scenario, if all the above policies are implemented, the RMB exchange rate against the US dollar will bottom out and reach 6.6-6.8 by the end of the year; under the pessimistic scenario, affected by changes in the external environment, the RMB exchange rate against the US dollar is expected to be around 7.2 at the end of the year.