Why Does The PBOC Allow The RMB Exchange Rate To Depreciate So Strongly?

In the 9 paction, the Central Bank of China has been lowering the RMB exchange rate. In November 16th, the central parity of the RMB against the US dollar decreased by 97 points to 6.8592, approaching the 6.86 pass, which fell for the ninth consecutive trading day, the longest fall since December 2015 and the lowest since August 19, 2008.

The central parity of RMB against the US dollar has depreciated 1.6% in 9 days.

In November 16th, offshore renminbi once fell below 6.89 mark, approaching 6.9, low to 6.8957, and has been refreshing its historical low.

Until yesterday, the offshore RMB exchange rate against the US dollar has depreciated by 5.48% this year, more than 4.46% of the full year depreciation in 2015, and the central parity of RMB has depreciated by 5.3%.

So why does the central bank allow the RMB exchange rate to depreciate so much this time?

It is impossible to explain the weakness of the currency, which is triggered by the strength of the dollar, since the dollar exchange rate rose from more than 70 to 100 in 2013-2014 years, when the non dollar currency fell sharply, and the renminbi also followed.

Strong and strong, the renminbi has not depreciated.

But this time, unlike the non dollar currencies, the RMB exchange rate is not strong with the US dollar, but weak with the weakness of the non dollar currency.

However, compared with other non US dollar currencies, the depreciation rate of the RMB exchange rate this year has been lower than other major non US dollar currencies.

For example, the current main non US dollar currencies, compared with this year's high position, have depreciated more than 7% of the value of the euro against the US dollar, the Japanese yen has depreciated more than 10%, and the pound has depreciated by 17%. However, after the 9 day decline in the RMB exchange rate, the depreciation rate is only 5.48%.

Therefore, in terms of a basket of currencies, the depreciation rate of RMB is not too large.

This is also an important reason why the continued depreciation of the RMB has not caused the sharp reflection of the international market.

After the RMB is included in the SDR, devaluation is a big probability event. Since the RMB is included in SDR, the RMB exchange rate system reform has taken an important step. The Central Bank of China will not keep the RMB stable at a certain level in a high cost way, but will increase the flexibility of the RMB exchange rate as the market situation changes.

At the same time, the Central Bank of China will certainly think that Trump's election will be a black swan in the international market because its probability is half to half.

In this regard, the Central Bank of China will surely have options.

It can be said that the recent trend of RMB exchange rate is the result of the implementation of this alternative.

It can be seen that since the RMB was included in the SDR in October 1st, the yuan began to depreciate continuously. Although the Chinese government has been stressing that the RMB has not depreciated continuously, some people have seen the depreciation of the RMB exchange rate to 6.8. 6.83 is the iron bottom of the depreciation of the RMB exchange rate.

The bottom can not be broken, and what serious consequences will be caused after it is broken.

But in fact, the depreciation of the RMB exchange rate has not only broken the iron bottom of 6.83, but also the central parity of the RMB on the shore has dropped 9 days. The closing price in November 16th dropped to 6.87, a 8 year low, and the futures market fell to nearly 6.88 on that day.

It can be said that after the successful election of President Trump, the market suddenly came to a 180 degree turn to Trump's policy after assuming office. He believed that the strong fiscal stimulus policy after Trump took office would increase inflation and speed up the pace of the Federal Reserve raising interest rate, thus making the US dollar stronger.

So,

The index continued to strengthen and reached the 100 mark.

As the US dollar index strengthened, not only did the non US dollar index fall, but also a large amount of capital flowed into the US dollar market.

The yuan also fell with the decline of non US dollar.

Some analysts believe that the continued depreciation of the renminbi and the recent devaluation of the RMB, the Central Bank of China is very calm, no intervention, this is the Central Bank of China to take this opportunity to go to the domestic financial market leverage.

This analysis holds that, in the case of accelerated depreciation of non US dollar currencies, the Central Bank of China will take advantage of the devaluation of the renminbi to release the previously devalued pressure on the renminbi, which will not cause other countries' accusations against China's currency war, and at the same time, it can also restrain asset bubbles by deleveraging and increase the flexibility of domestic monetary policy.

However, this argument can be stained with one side, but this is not the case.

In fact, the central bank allowed the RMB exchange rate to continue.

It is a way to adopt a preventive devaluation in order to deal with the uncertainty of the economic policy of President Trump.

Because Trump is not only a businessman, but the uncertainty of the future economic policies of the United States is normal. How his economic policy will be launched should be rather uncertain. And during his presidential election, Trump had a series of remarks that were not conducive to the stability of the market exchange rate.

For example, against globalization of trade, accusing China of manipulating exchange rates.

The Central Bank of China has already had a pre election response to Trump's possible economic policy after taking office.

The continued depreciation of the Renminbi should be part of this pre election plan.

That is to say, in the face of Trump's possible economic policy, if the Chinese government can prepare ahead of time and take preventive depreciation of the RMB, it will not only be more proactive for the future trade and economic policy between China and the United States, but will also play more cards in the negotiations, and it will also be easier to adjust with the changes in the economic situation, so that China will be more favorable in negotiations.

This article thinks that this train of thought is right.