After the publisher/RMB exchange rate suddenly plunged at the end of February, the People's Bank of China [microblogging] officially expanded the renminbi exchange rate volatility to 2% on March 17, further promoting the exchange reform. Is this the result of the central bank’s active regulation or the sudden surge of capital? What are the consequences of the RMB depreciation on the Chinese economy? What will the central bank do next after moving towards the key steps of establishing a market-based exchange rate mechanism? What are the risks or opportunities for Chinese companies?
Since February, the continuous decline of the RMB exchange rate has been interpreted by the outside world as the regulator's intention to promote, but the foreign exchange account data released by the central bank on March 18 shows that this seems to be more market behavior. The depreciation of the renminbi, the outflow of hot money, and the slowdown in economic growth have led researchers to believe that management will lower the deposit reserve ratio, but at the same time some economists believe that the RRR cut means that the previous efforts to "normalize credit policies" will be abandoned.
Will the RMB depreciate by 10% in the next two years?
Since mid-February this year, the renminbi has started a wave of rapid downward adjustments. At the beginning of March, it once turned up, and in recent weeks it has ushered in a rapid decline. On March 19, the spot exchange rate of the RMB against the US dollar fell below 6.20 yuan, hitting a new low in the past 11 months. And this wave of decline since February has already caused the RMB exchange rate against the US dollar to depreciate by nearly 2%.
For this devaluation, the market once judged that the central bank intends to promote, because the volatility of the renminbi against the US dollar will expand to 2% from March 15, the central bank needs to guide the unilateral rise in the exchange rate market. The fall in February also made the yuan one of the most attractive emerging market arbitrage currencies into one of the least attractive (Bloomberg data).
In response, the Ministry of Commerce spokesperson Shen Danyang said at a press conference on March 18 that the recent fluctuations in the RMB exchange rate have more to show the role of the market. Statistics show that China’s exports in February totaled 114.094 billion U.S. dollars, down 18.1% year-on-year; while the total value of imports was 137.82 billion U.S. dollars, up 10.1% year-on-year; the trade deficit reached 22.989 billion U.S. dollars, which is the biggest deficit in the past two years. .
Foreign trade data is not satisfactory, and other data also show that the economy began to slow down in the first two months of this year. From January to February this year, the added value of industrial enterprises above designated size increased by 8.6% year-on-year. This is the first time since July last year that the growth rate has fallen below 9%. In the same period, the nominal growth of the national total retail sales of social consumer goods was 11.8%, which was set in 2013. The new low since. Some economists believe that a series of policy guidance such as “anti-corruption, anti-waste, and restrictions on real estate investment†have led to a collective slowdown in consumer data.
On the other hand, the national fixed asset investment rose by 17.9% year-on-year, which is the lowest since 2013. Data on exports, consumption, and investment in the “troika†are not satisfactory.
The PPI, which has a predictive effect on real economic growth in February, also fell year-on-year. This is a continuous decline of 24 months since March 2012, and it has not seen a possible stop. This shows that the demand for industrial production materials is still falling, while commodities have to be sold at a reduced price, and the real economy is shrinking.
The economic slowdown and the depreciation of the renminbi are followed by hot money outflows. According to data released by the central bank on March 18, foreign exchange holdings of China's financial institutions increased by 128.2 billion yuan in February, a record low of nearly five months, a sharp drop of 309.12 billion yuan from January. Since October last year, China’s foreign exchange holdings have remained at a high level. In the past four months, there have been three months, and foreign exchanges have increased by more than 400 billion yuan.
However, the depreciation of the renminbi in February reduced cross-border capital inflows. In this regard, Daiwa Capital Market recently released a research report saying that with the Fed's reduction of quantitative easing and rising credit risk, the future will trigger a large amount of funds to flee from China. From now until the end of next year, the RMB will depreciate by 10%.
Reduce the release of liquidity?
But Shen Danyang believes that FDI (Foreign Direct Investment) data shows that foreign investors are still very confident about China. Some economists also believe that hot money outflows are not the same concept as investing in China, which is more reflective of investors' long-term strategies. Despite the decline in FDI in February, the data for January-February this year still increased by 10.44% year-on-year to US$19.31 billion.
Lu Zhengwei, chief economist of Industrial Bank, said that the more obvious effect of the depreciation of the RMB exchange rate is reflected in the fight against hot money. The limited depreciation has little effect on the physical sector. However, in the overseas capital market, some industries with higher external debts have taken the lead in falling. Among them, China property stocks fell most obviously, and China Overseas Land and China Resources Land, which have always been known for their stability, continued to fall.
Analysts believe that Hong Kong-listed mainland real estate companies have borrowed a large amount of US dollar debt in the past few years. The interest rate is usually around 8% to 10%. During the RMB appreciation period, some interest rates and exchange rates are offset. But once the renminbi has a depreciating tide, interest rates will overlap with the exchange rate. According to the data, in the fourth quarter of last year, mainland real estate companies issued more than 8 billion US dollars of bonds in Hong Kong. Some small and medium-sized real estate developers have interest rates of more than 10%. For example, Wuzhou International has a coupon rate of 13.75%. The depreciation of the RMB by 2% in the past two months means that the cost of liabilities of these developers will increase accordingly.
However, some investors believe that China's economic decline is now close to the management's bottom line. In order to stimulate the economy, the central bank may release liquidity by lowering the deposit reserve ratio. The Chinese property market, which is very sensitive to liquidity, will see another wave of rising opportunities.
According to a recent study by Societe Generale, China’s economic data for January-February are far below expectations, confirming that China’s economic growth has deteriorated rapidly after entering 2014, and the data may exceed the tolerance set by the new government. The central bank may use this to lower the deposit reserve ratio.
When Premier Li Keqiang answered the lowest economic growth rate at the two sessions, he said: "Since we say that the expected target of GDP growth is about 7.5%, it is flexible, higher and lower. We are tolerant. As for What is the acceptable lower limit, that is, GDP must guarantee more adequate employment and increase the income of residents. We do not pursue GDP in a one-sided way, but we still need to be close to the GDP of ordinary people and improve the quality and efficiency, energy saving and environmental protection of GDP."
Societe Generale expects GDP growth to be below 7.5% in the first quarter of this year, possibly only slightly above 7%. This will touch the bottom line of the new leader, so the reserve requirement ratio may be reduced by 50 basis points in the short term.
The RRR may be abandoned
Peng Wensheng, chief economist of CICC, also believes that as the pressure of economic growth is lower than the government's target, the pressure for policy relaxation will increase, but the intensity and pace will be uncertain. Peng Wensheng believes that unless the economic growth rate further declines sharply, the real estate bubble is obviously suppressed, and the probability of the central bank reducing the deposit reserve ratio is not large.
The most important reason is that the stimulating effect of the RRR may be very limited. In the usual sense, a RRR cut will release the liquidity of the bank, which in turn will lower interest rates and drive physical investment. The last wave of the RRR cycle was from December 2011 to May 2012. When the first time the RRR was lowered, the interest rate center of the interest rate level was about 4%. After the RRR cut, it quickly went down to 3%, and then dropped to the end of the cycle. 2.5%.
However, the current domestic R007 is less than 3%, according to the March 18 data shows only 2.66. In February, RMB loans increased by 644.5 billion yuan, an increase of 24.5 billion yuan year-on-year. This shows that liquidity is still loose. However, the economic data for the same period was not satisfactory. In addition to the above data, the electricity consumption in February also showed a new low since May, and international investment banks have lowered their growth expectations this year. It shows that the slow relationship between economic growth and monetary easing is weak, and the stimulating effect of the RRR on the economy seems to be limited. Ha Jiming, chief investment strategist at Goldman Sachs China, said that if monetary policy is relaxed at this time, such as lowering the deposit reserve ratio, it may trigger a faster depreciation of the renminbi. Zhu Haibin, chief China economist at JPMorgan Chase, also believes that RRR cuts and credit expansion may not help stimulate the economy, but will further exacerbate structural imbalances. Moreover, the central bank has been doing everything possible to normalize the credit policy, which is the so-called “loan easing†action. Once the RRR cut begins, the normalization of a busy year will be abandoned. Therefore, he also judges that the possibility of RRR reduction is very small.
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