RMB Surges 4,500 Points, Defying US Rate Hikes
The year 2022 has come to a close, with the Chinese yuan continuing its decline for most of the year, only to experience a strong reversal in the last two months. Even though the US dollar is still in a rate-hiking cycle, and future rate hikes are expected, the yuan has already appreciated by 4,500 pips. Moreover, despite the yuan's depreciation, foreign capital did not flee but instead made significant purchases of Chinese assets. Therefore, we can confidently infer that the yuan's upward momentum will not stop in 2023. The specific influencing factors are as follows:
01. A Surge of 4,500 Pips
If we examine the monthly trend of the yuan against the US dollar, we will notice a slight decline in January, followed by a significant increase in February. The decline that began in March initiated a continuous eight-month downward trend. As shown in the figure below:
The decline in March was relatively large, followed by a slow decline from April to June, and then the decline intensified again from July to September.
However, in the last two months of the year, the yuan experienced a dramatic reversal, especially with a 2,900 pip increase throughout November. From the lowest point of 7.3745 at the end of October to the current 6.9273, the yuan has appreciated by 4,500 pips, completely erasing the effects of two 75-point rate hikes and one 50-point rate hike by the Federal Reserve during this period.
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Now, we can confidently say that even if the US dollar continues to raise interest rates next year, it will be difficult to change the upward trend of the yuan.If the US dollar continues to reduce the magnitude of interest rate hikes, or halts the pace of rate increases, then the appreciation of the Chinese yuan will significantly accelerate.
02, Economic Strength
In fact, regardless of whether the US dollar raises interest rates next year, or whether it is possible to shift from raising rates to lowering them, the most fundamental reason for the continuous strengthening of the Chinese yuan is the strong backing of China's economy.
Just a couple of days ago, the National Bureau of Statistics released the final verified data for the 2021 GDP, which increased by 556.7 billion yuan compared to the preliminary budget value, raising it by 0.3 percentage points, and ultimately reaching 114.92 trillion yuan.
The GDP grew by 3% in the first three quarters of this year, and it is estimated that the growth rate in the fourth quarter will be higher. Coupled with an approximate 2% inflation for the entire year, we can infer that this year's GDP should exceed 120 trillion yuan.
03, Continuous Inflow of Foreign Capital
I have always emphasized that the greatest disadvantage of a falling exchange rate is the withdrawal of foreign capital. However, this did not occur when the yuan depreciated previously; instead, overseas capital has consistently maintained a significant increase in its holdings of Chinese assets, providing more momentum for the yuan's appreciation.
In the past month or so, it has been very evident that overseas funds have been bottom-fishing in Chinese assets while also buying up the yuan exchange rate in the foreign exchange market to gain multiple benefits.
As a result, we have observed that in the recent period, the offshore yuan exchange rate has been 50 to 100 basis points higher than the onshore rate, which fully indicates that the funds buying yuan in the offshore foreign exchange market are more robust.
04, Demand for Settlement of Foreign ExchangeOn the other hand, as the year draws to a close, domestic foreign trade companies in China are actively converting their foreign currencies, which provides strong support for the Chinese yuan. The current exchange rate levels are more favorable for companies to settle their foreign exchange compared to the average for the entire year. Not only can they obtain more Chinese yuan, but they can also avoid losses from future depreciation of the US dollar when settling their foreign exchange.
This year, China's trade surplus has been continuously expanding, with the cumulative surplus amount reaching 5.34 trillion yuan in the first 11 months. Even if only a portion of the additional foreign exchange is converted into Chinese yuan, it plays a significant role in strengthening the yuan.
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