RMB Offshore Soars nearly 2,200 Basis Points, Hits New High in Nearly Four Months Why has the RMB recently surged against the USD? Will it continue to appreciate strongly?

RMB exchange rate is stable and normal, concerns about A-shares are misplaced.

I’m not worried about the exchange rate, but I am a little worried about the A-share market.

The exchange rate trend is normal, but the A-share market trend is abnormal.

When the US dollar index rises and there are high expectations of a US interest rate hike, the RMB exchange rate is indeed under pressure, fluctuating around 7.3.

But now the US dollar index has come down, expectations of a US interest rate hike are decreasing, and economic data is stabilizing, so the pressure on the RMB exchange rate is relieved.

During this period, there has been a substantial appreciation, which is a normal trend.

US interest rate hike - RMB exchange rate under pressure.

Probability of a US interest rate cut - less pressure on the RMB exchange rate.

These are valid trends, and they make sense.

The A-share market just can’t perform well no matter what.

When the exchange rate depreciates, the A-share market doesn’t perform well; when the exchange rate appreciates, it still doesn’t perform well.

In theory, when the RMB exchange rate appreciates and is expected to fluctuate and appreciate in the future, RMB assets should also appreciate.

This is a very simple concept.

The US dollar is weakening, and there is a high probability that the US will cut interest rates next year.

The capital market should respond to that.

The US stock market has seized this opportunity and has rebounded significantly, almost reaching new highs.

This is an efficient market, a normal logical trend.

There is no short-term negative news, only positive news, so there should be a rally.

As for the future, we’ll talk about it later. If there is another sudden interest rate hike, then we’ll adjust again.

The stock market itself is a market with relatively sharp short-term reactions.

But the A-share market has no reaction at all. The Shanghai Composite Index has been weak regardless of negative or positive news.

Many friends who like to invest in A-shares, they are always concerned about the exchange rate.

They worry every day that the exchange rate will reach 8 or 9, fearing that it will cause a sharp decline in their own stocks.

I think they are worrying for nothing. The exchange rate is indeed well-controlled.

It has always been as the authorities have said, not moving in a one-sided direction, but fluctuating within a certain range.

It’s the A-share market itself that is weak and has not shown a normal fluctuation.

Worrying about the exchange rate is really unnecessary. The exchange rate will fluctuate or even go down in the future, and we will eventually see it at 6.

When will the A-share market rise and catch up with the exchange rate? It’s hard to say for now.

It is indeed quite weak. We should pay more attention to the A-share market, complain and criticize the A-share market, and attacking the exchange rate, mocking it, is indeed targeting the wrong object.

Looking at the performance of the exchange rate so far, it has been relatively normal and strong.

The Impact of RMB Appreciation on Prices

I don’t think the accurate description is “strong appreciation”, but rather “the disappearance of the downward pressure on the RMB’s depreciation”.

If we want to analyze why the RMB has recently surged against the US dollar, we need to first analyze why the RMB has depreciated. In the past two years, the RMB has faced significant selling pressure and depreciation, mainly due to the following reasons:

1. The strong interest rate hike by the Federal Reserve, which is a harvesting cycle for the US dollar. During this period, not only the RMB, but also the currencies of major countries have been depreciating against the US dollar.

2. The reality of a weak and fragile domestic economic recovery, which requires loose monetary and fiscal policies that are in contrast to the tightening policies in the US. Therefore, these policies are not enough to support the RMB exchange rate. Especially since 2023, the depreciation of the RMB against the US dollar has been greater than that of the euro area, which followed the Federal Reserve’s interest rate hike measures.

3. Global demand decline has put pressure on exports. In the context of sluggish investment and weak domestic demand, exports are also an area that needs to be maintained, and it is well known that depreciation of the domestic currency is beneficial for exports. Therefore, the depreciation of the RMB also has an additional “active” meaning.

Among these three factors, the factor that has the greatest impact is undoubtedly the Federal Reserve’s interest rate hike.

From the current perspective, with the release of US economic data in October, it has been proven that US inflation has been partially contained. The probability of another interest rate hike by the Federal Reserve is not high, and the market has already speculated on the expectation of an interest rate cut in advance. As a result, the US dollar index has plummeted significantly in just one week, and the depreciation pressure on the RMB has sharply decreased.

So, will the RMB continue to appreciate in the future?

This point needs to be discussed in conjunction with the domestic fundamentals. Currently, although the overall trend of China’s economic fundamentals has not changed, the foundation for the bottoming out of China’s economic fundamentals is not yet solid. Many specific economic indicators have been fluctuating in October, local government debt and the real estate crisis have not been completely resolved, domestic consumption demand has not been boosted, and export pressure still exists.

Given the above situation, it is expected that China will continue to increase the stimulus of fiscal and monetary policies in the foreseeable future. Whether it is reserve requirement ratio cuts, interest rate cuts, or debt issuance subsidies, the level of stimulus will be further loosened on the basis of the previous stage, especially in the case of a sharp decrease in depreciation pressure on the RMB.

Therefore, “fiscal and monetary policies will become one of the main factors affecting the RMB exchange rate in the next stage”.

And the loose monetary and fiscal policies themselves are a “bearish factor” for the RMB. As a result, it is uncertain whether the RMB can maintain its strong appreciation in the future, but the depreciation pressure is indeed very small.

If fiscal and monetary policies can significantly stimulate the improvement of the fundamentals, or exceed market expectations, then the main factor affecting the RMB exchange rate will shift from the “policy side” to the “fundamental side”, and at that time, the RMB will definitely enter the “appreciation channel” with certainty.

Therefore, a more accurate statement should be that the passive depreciation pressure on the RMB has disappeared, and whether it can maintain its appreciation trend will depend on the performance of the subsequent fundamentals.

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Also, let me add a few words about whether RMB appreciation will have any impact on prices.

RMB appreciation means the appreciation of foreign currencies, and it will not directly affect domestic prices. However, there will still be indirect effects.

RMB appreciation means that the purchasing power of the RMB for foreign goods, raw materials, and energy will increase.

From the perspective of upstream production, RMB appreciation will reduce the import costs of raw materials and energy for producers, thereby reducing production costs and allowing producers to have more “room for price reduction”. This will have a certain dampening effect on prices.

From the perspective of downstream consumption, RMB appreciation will enhance China’s import capacity. As more and more imported goods enter the market, it will stimulate competition and promote price reductions for domestic products. Therefore, it will still have a dampening effect on prices. Additionally, due to RMB appreciation, the prices of imported goods will also decrease relative to domestic prices.

The Future of Inflation and Monetary Policies

There are some things here that many people may not like to hear. The fluctuations of the Chinese yuan in recent years are weakly correlated with internal monetary policy. In terms of trend, countercyclical regulation only slows down the amplitude, making the trend appear smoother. Based on the performance of recent years, the correlation with the monetary policy of the Federal Reserve in the United States is higher. When the US dollar index (relative to a basket of currencies) strengthens, the yuan weakens, and when the US dollar index weakens, the yuan strengthens. The correlation is strong, and even the magnitude is roughly aligned.

The current monetary policy of the Federal Reserve heavily relies on inflation indicators. In other words, there are not many conspiracy theories. The core goal of the Federal Reserve is to suppress inflation. When the inflation indicator is lower than expected, the market tends to be optimistic, and expectations of a Fed rate hike decrease, causing the US dollar index to weaken. Conversely, if the inflation indicator is higher than expected, the US dollar index strengthens. Therefore, predicting the future trend of the yuan exchange rate depends heavily on predicting the US dollar index, which in turn relies heavily on predicting future US inflation. This is a key factor in making predictions.

Predicting the future direction of US inflation is highly dependent on the trend of money supply. According to the latest data, M1, which represents liquidity, has decreased from a peak of 20.66 trillion yuan to 18.17 trillion yuan in September. Before April, it had one slope (decline rate), and after April, it had another slope, showing a linear downward trend. In September, M1 supply decreased by $132 billion compared to August. At this rate, it is estimated to decrease by about $1.5 trillion in a year. The year-on-year growth rate of M2 is around -3.6%, also showing a downward trend. Although compared to the massive injection of money into the market in 2020, both are still insufficient, it is still a process of draining liquidity. If this efficiency continues for two or three years, the purchasing power of the currency may improve.

The second issue is the base effect. The decline in this year’s CPI is largely related to the base of last year. For example, in June this year, the CPI reached a low point of 3%, followed by a rebound. This is because the base in June last year was the highest, and June was widely discussed in many live broadcasts at the end of last year and this year, mainly for mathematical reasons. So when will the base effect disappear? Let’s set a threshold first. If we consider 5% or above as a high base and below 5% as a low base, the high base effect of US CPI should disappear around March next year, corresponding to the CPI of 4.98% in March of this year. If we consider 3-4% as a low base, then the high base effect will be eliminated around June next year. Only then can the real level of inflation and the effectiveness of inflation control be reflected. After all, even though the CPI in October was lower than expected, it was still obtained under the base of 7% last year.

The third issue is the political cycle. There is a game in this. Increasing interest rates and liquidity drainage will almost always slow down economic activity, including the retreat of asset bubbles, including the stock market and the real estate market. However, voters also care a lot about inflation. They want both inflation and welfare distribution before the elections, such as loose monetary and fiscal policies. Therefore, the monetary cycle often has a strong influence from the political cycle. Combining the above base issues, next year will be when the real effect of controlling inflation can be seen. This makes it difficult to achieve the 2% target.

Therefore, it is very likely that inflation will still be above 3% in the future. This does not mean that interest rate hikes and the decrease in money supply are ineffective, but rather that efficiency takes time, and the base effect has a significant impact. This year, CPI data can still benefit from the high base of last year, but the impact will not be as significant next year, and it will be closer to the real level. As long as inflation does not reach the expected target of around 2% and can be relaxed to below 3%, the Federal Reserve is unlikely to cut interest rates, and maintaining a US dollar index above 100 will be the norm. However, without interest rate hikes, there will not be significant fluctuations. As a result, the exchange rate of the yuan will remain stable within a range of around 0.2 from 7.

Of course, predictions are difficult. In recent years, the basic consensus is that there is a lot of uncertainty in the global economy, and it is difficult to guarantee that there will not be any unexpected events. But the overall logic still stands:

The trend of the yuan is strongly correlated with the US dollar index - The US dollar index is strongly correlated with the Federal Reserve’s monetary policy choices - The Federal Reserve’s monetary policy is strongly correlated with domestic inflation and the political cycle. 1) The efficiency of inflation and liquidity drainage (which can be estimated roughly based on the decline in M1 and M2) is strongly correlated with the base effect. 2) It is related to the choice of the US political cycle. Whether or not to give the market a sweet date before the next year’s election.

As for our internal monetary policy, it may not be closely related to the exchange rate of the yuan. We can still make rough predictions. Compared with the monetary policy in the United States (after all, the market did not anticipate such intense interest rate hikes), our monetary policy is more predictable. Under high leverage, the possibility of interest rate hikes approaches zero, and as for interest rate cuts, there are not many chips left and they will not be used up in one go. It is expected that next year, there will be at most a 10-20 basis point interest rate cut, including the Medium-term Lending Facility (MLF), bank deposit rates, and the Loan Prime Rate (LPR), and it is normal for the growth rate of monetary supply to be 4-5 percentage points higher than nominal GDP growth. Under high leverage, the only way to avoid a hard landing is to reduce the interest on debt and continue to provide more currency. The former reduces the pressure of existing debt, while the latter maintains the occurrence of systemic defaults through debt financing.

The Formation of Exchange Rate and Its Influencing Factors

This question has been discussed several times before, and my viewpoint has always been “teaching a man to fish is better than giving him a fish.”

What’s important is not one or two specific conclusions, but the method of reaching conclusions.

If you don’t grasp the basic methods and principles, today when the exchange rate rises and you ask why, tomorrow when the exchange rate falls, you won’t understand why either.

In this article, I will explain the transmission process of the current RMB exchange rate and clarify the basic principles, and everyone can make their own judgments.

Regarding the formation of exchange rates, the current mainstream view is as follows: (1) The core factor affecting the formation of exchange rates is international balance of payments. (2) Fluctuations in the US dollar index are the main external factors affecting the RMB exchange rate. (3) The management of the central bank also plays a certain role in exchange rates.

01 The relationship between international balance of payments (foreign exchange reserves) and exchange rates

The core factor determining the RMB exchange rate is China’s international balance of payments, which reflects the balance of payments of current and capital accounts and is reflected in changes in foreign exchange reserves.

The exchange rate itself is formed in the process of buying and selling currencies, so a country’s international balance of payments (surplus or deficit) is the core factor determining the exchange rate. International balance of payments mainly includes current account (which can be simply understood as trade) and capital account (which can be understood as investment). Let’s take the current account as an example to illustrate how international balance of payments affects the exchange rate.

Suppose you have a company and your company needs to pay a payment of $1 million to a company in the United States after one month. You go to your bank, Bank A, and ask them to pay $1 million to your overseas customer on your behalf. Bank A quotes you and tells you that you need 6.7325 million RMB to buy $1 million. You agree and complete the transaction. At this time, there is an exchange rate, which is 1:6.7325 for the US dollar to RMB. This exchange rate can be regarded as the “retail” exchange rate, and the market formed by this exchange rate is called the “retail market”, which is the market between banks and customers.

For various reasons (such as insufficient foreign exchange), Bank A may also buy foreign exchange from other banks or non-bank financial institutions. This market is called the interbank market. The exchange rate in the interbank market is generally more favorable, and the difference between the interbank market and the retail market constitutes one of the bank’s revenues. For example, Bank A buys $1 million at a price of 1:6.7125, using 6.7125 million RMB to buy $1 million. With these two transactions, the bank earns a difference of 20,000 RMB. So, which exchange rate do we usually refer to when we talk about exchange rates? Generally speaking, the exchange rate we often refer to is the exchange rate formed in the interbank market.

The reverse is also true. If your company receives foreign exchange income, such as $1 million, you can also sell it to your bank. Your bank can also sell these dollars in the interbank market to make a profit.

A country with a trade surplus is a net capital inflow country (only considering the current account). In this case, it can be simply understood as: (1) More and more domestic companies are earning dollars and selling them to banks (buying RMB with dollars). (2) Because more and more RMB is being bought with dollars, the RMB becomes more and more in demand and more expensive (for example, 100 dollars used to buy 700 RMB before, and now 100 dollars can only buy 680 RMB). The RMB exchange rate has risen.

Because international balance of payments has two accounts, one related to trade and one related to capital, a trade surplus alone (i.e., current account) cannot reflect the overall international balance of payments. For example, a country has a strong export and a trade surplus of $10 billion, but its businesses invest the entire $10 billion overseas, resulting in a capital account deficit of $10 billion. In this way, the international balance of payments is zero. International balance of payments considers the balance of payments of both the current account and the capital account, and the balance of international balance of payments corresponds to the increase or decrease of foreign exchange reserves.

Therefore, we can simply understand that if a country’s foreign exchange reserves continue to increase, then the exchange rate will continue to rise.

02 Carry trade and the change in China’s foreign exchange reserves since August

In the whole of August, China’s foreign exchange reserves decreased by $44.2 billion, half of which was due to exchange rate and interest rate adjustments, generally caused by the US interest rate hike. Here is a brief explanation.

Foreign exchange reserves are generally foreign bonds and need to be converted into US dollars. In August, the euro, yen, pound, and other currencies depreciated, resulting in a contraction of China’s foreign exchange reserves. In addition, since foreign exchange reserves are mostly foreign bonds, and the price of bonds is inversely related to interest rates, when the yield rises, the price of bonds falls. In August, the yield of euro, US dollar, yen, and pound-denominated bonds all rose, so our foreign exchange reserves declined accordingly.

Changes in exchange rates and interest rates resulted in a contraction of China’s foreign exchange reserves by $20 billion. Another $20 billion was due to the US interest rate hike, which led to a substantial outflow of funds. Why does the interest rate differential lead to capital outflows? Let’s take an example to illustrate.

Suppose you are a billionaire with $1 billion in liquid funds that need to be deposited in a bank. Let’s say at the beginning of 2020, the deposit interest rates in the UK and the US were both 1% per year. At this time, for you, it doesn’t make a difference whether you deposit your money in the UK or the US, as the annual interest is both $10 million. Upholding a sense of fairness and justice, you deposit $500 million in the US and $500 million in the UK (corresponding to pounds).

Suddenly one day, the Federal Reserve announces an interest rate hike, leading to an increase in deposit interest rates in the US to 3%. You realize that $500 million deposited in the UK will only earn $5 million in interest for a year, while depositing in the US will earn $15 million in interest, resulting in a difference of $10 million. You make a phone call to your secretary and ask him to inform the UK bank that you want to withdraw all your money and exchange it into US dollars to be transferred to a US bank.

Not only did you discover this arbitrage opportunity, but many large investment institutions also found this arbitrage opportunity. So these large investment institutions have been borrowing low-interest pounds from UK banks and buying US dollars to earn the interest rate differential. This process is called “carry trade,” which is an important factor leading to capital outflows.

Some people say that we have foreign exchange controls and cannot engage in carry trade. This is incorrect. It is indeed difficult for ordinary people to engage in arbitrage, but large institutions have various channels to transfer funds. The latest report from Shenwan Hongyuan points out, “The difference between the ten-year government bond yields of China and the United States fell by 22 basis points to -1.53% in August, and even reached a low of -1.80% in the middle of the month. This has caused sensitive funds to flow out.”

03 Carry trade (yield curve inversion) causes exchange rate decline

Carry trade leads to capital outflows, which in turn leads to the depreciation of the exchange rate. Why is that? Let’s take an example.

Suppose you are the head of a large investment institution and you have discovered a significant “carry trade” opportunity in the financial markets of the UK and the US. So you borrow £1 billion from a UK bank at a low interest rate and plan to invest it in the US to take advantage of the interest rate differential.

However, you have pounds in your hand, and if you deposit pounds in a US bank, you cannot enjoy the interest on the US dollar, as the interest on bank deposits is tied to the currency. In other words, before you deposit pounds in the US, you need to convert your pounds into US dollars. So, you have to buy US dollars with pounds in the foreign exchange market before depositing them in a US bank. This process is the process of foreign exchange trading.

More and more people are borrowing pounds at a low interest rate from UK banks and buying US dollars in the foreign exchange market, making the US dollar more and more in demand. Previously, 100 pounds could buy 120 US dollars, but now 100 pounds can only buy 110 US dollars. The US dollar is becoming more and more “expensive,” and correspondingly, the pound is becoming cheaper, which is reflected in the depreciation of the pound against the US dollar.

In fact, since the US interest rate hike, major currencies have started to depreciate. This also constitutes an important reason for the current decline in China’s exchange rate. The US interest rate hike and the interest rate differential between China and the US lead to a wider interest rate differential, creating a larger space for carry trade and triggering capital outflows, which in turn leads to the depreciation of China’s exchange rate.

04 The influence of the US dollar index

Against the backdrop of a deteriorating international balance of payments, if the US dollar index strengthens, it will further lead to a decline in the exchange rate and trigger market turbulence. Let’s take an example.

Suppose you have a company that earned $1 million in foreign exchange at a certain time point T. Will you sell it to the bank immediately? The answer is no. For example, if the US dollar is strong and you expect the US dollar to RMB exchange rate to rise from 1:6.7 to 1:6.9 after two months, you will not immediately exchange your dollars for RMB. Instead, you will hold onto the dollars and wait for the right timing. If you exchange now, you will get 6.7 million RMB, but if you wait for two months, you will get 6.9 million RMB.

This creates a situation where although there is a surplus of $1 million in international balance of payments, this $1 million has not entered the foreign exchange market through bank settlement and sale, so it does not directly affect the supply and demand in the foreign exchange market, and therefore cannot directly cause exchange rate fluctuations. In other words, due to the strong US dollar, companies expect the US dollar to RMB exchange rate to continue to rise, so they hold onto their dollars. Although a surplus in international balance of payments is formed, it does not directly lead to an increase in the RMB exchange rate. Or in other words, it slows down the upward trend of the RMB exchange rate.

A key indicator for judging whether the US dollar is strong or not internationally is the US dollar index. The US dollar index is a weighted index of six currencies against the US dollar (with the euro accounting for 57.6% of the weight), reflecting the exchange rates of the US dollar against major currencies.

A strong US dollar will increase the expectation of RMB depreciation, reduce the impulse to sell dollars, and further increase the possibility of RMB depreciation, forming a downward spiral.

Moreover, a strong US dollar combined with a US interest rate hike can also trigger market turbulence. To understand this issue, let’s immerse ourselves in an example.

Suppose you are an international investor from the US and your funds are allocated in major global stock markets. Let’s say at the beginning of 2022, the exchange rate between the pound and the US dollar was 1:1. You discovered through research that the UK stock market might experience an uptrend, so you spent $1 million to exchange for £1 million and then used the £1 million to buy stocks in the UK stock market. Your insight was correct, and the stock you bought had a good performance, increasing to £1.2 million in a few months, making you happy.

But unforeseen circumstances arose. One day, you suddenly saw news that the US has raised interest rates. You immediately realized that this might be bad news. As expected, speculators who relied on interest rate differentials mobilized and borrowed pounds at a low interest rate to buy US dollars. As a result, the US dollar kept rising, and the pound kept depreciating. You suddenly discovered that the money you made from the stocks was actually an illusion. After carefully calculating, you found that since the beginning of 2022, the pound has depreciated by 15% against the US dollar. The £1.2 million you have now can only be exchanged for $1.02 million, nearly approaching your initial investment.

What’s even more frightening is that the Federal Reserve continues to raise interest rates, which means the trend of the pound depreciating may continue. If this continues, your stocks will be converted into dollars at a loss. What do you do? You tell yourself to make a decision. So, you start selling stocks on a large scale and switching to cash, buying US dollars as a “safe haven.”

More and more people realize this issue and start selling stocks as well. The stock market begins to reverse, negative news keeps coming, and when the majority of people are selling, two phenomena occur: (1) A large amount of selling pressure will lead to market volatility. (2) A large outflow of funds will further intensify capital outflows and the depreciation of the exchange rate.

Historically, the US dollar index has been highly correlated with China’s exchange rate.

If a country’s capital market is already unstable, capital outflows will be faster.

Conversely, a weakening US dollar will generally lead to a stronger exchange rate for the RMB.

05 Under what conditions can the RMB rebound

We are also concerned about the question of what conditions can stop the decline of the RMB.

Central bank policies can have some short-term effects. Previously, when the exchange rate depreciated significantly, the central bank reduced the reserve requirement ratio for foreign exchange deposits, which means that each foreign exchange deposit requires less reserves to be set aside. This increases the amount of foreign exchange available for circulation, increases the supply of foreign currency in the foreign exchange market, and thus supports the RMB exchange rate. The central bank has various tools at its disposal, and the simplest and crudest method is to directly use foreign exchange reserves to buy RMB and support the exchange rate.

However, from a medium to long-term perspective, the core of the RMB rebound lies in the improvement of the international balance of payments. The conditions for the improvement of the international balance of payments are as follows:

(1) A significant rebound in net exports, with a rapid increase in trade surplus leading to an increase in foreign exchange reserves.

(2) The revitalization of the domestic asset market, with a substantial increase in the return on domestic assets, triggering foreign capital inflows and increasing foreign exchange reserves.

(3) A weakening of the US dollar may also lead to a stronger RMB exchange rate. Take a look at the chart below. The US dollar index (highlighted in shadow) has been declining recently due to various reasons such as a slowdown in interest rate hikes, and the spot exchange rate of the US dollar against the RMB has followed suit.

However, it should be noted that none of the above factors are single factors, but factors that comprehensively affect the exchange rate.

Some excerpts from the article “About the mechanism of exchange rate formation” are included in this article, and the full article is published in “Zoe’s Book Club.” In “Zoe’s Book Club,” you can study and progress together with hundreds of star friends from all walks of life, learn more paths, and avoid more pitfalls.

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One: Inflation, Interest Rates, Exchange Rates, and Monetary Policy

1. On July 8, I predicted that the US interest rate hike would further push down the RMB: link

2. On July 10, I predicted that the US interest rate hike would put pressure on the exchange rate: link

3. On July 11, I shared an article from The Economist on the US labor market and interest rates: link

4. On July 19, I predicted that monetary easing and reserve requirement ratio cuts were likely in the third quarter: link

5. On July 29, I shared information on rising oil prices and inflation pressure: link

6. On August 11, I explained the mechanism of exchange rate formation in an article: link

7. On August 30, I shared an article on the impact of interest rate differentials and fundamental factors on the RMB exchange rate: link

8. On September 10, I reviewed the internal logic of the decline in the RMB exchange rate: link

9. On September 15, I shared information on rising oil prices and the pressure for the US to raise interest rates: link

10. On October 6, Bloomberg analyzed the various impacts of high interest rates on the economy: link

Two: Real Estate Related Issues and Materials

1. If house prices fall, how much will they eventually fall: link

2. Can property prices continue to be supported: link

3. Pricing model for future house prices: link

4. In-depth report: Understand the impact of current real estate policies link

5. Analysis report on real estate vacancy rates: link

6. Analysis of real estate default risks: link

7. Calculation of the impact of real estate defaults on banks: link

8. Full analysis of the real estate industry chain: link

9. Impact of changes in population structure on real estate: link

10. Half-year data review of the real estate industry: link

Three: Fundamental Analysis

1. Are we facing deflation or inflation: link

2. Goldman Sachs' “Impossible Trinity”: link

3. De-dollarization and international currency reform: link

4. Review of global economy for the first half of the year: link

5. Where does the money of residents go: link

6. Insights from people working in the financial industry about the current situation of local government debt: link

7. Interpretation of the July meeting: How to judge the current economic situation: link

8. How to view the current decline in consumption: link

9. Global overcapacity situation: link

10. Analysis of the impact of a potential trust industry crisis on the economy: link

Four: Methods of Analyzing the Economy

1. Why does tax reduction lead to a decrease in savings: link

2. Understanding the inventory cycle with one article: link

3. Understanding M0, M1, and M2: link

4. The relationship between the expansion of the central bank’s balance sheet, new social financing, and the growth of M2: link

5. How to analyze credit and financing data: link

6. How to analyze PMI data: link

7. How to analyze the total profits of industrial enterprises: link

8. The impact of narrowing interest rate differentials on bank deposit rate adjustments: link

9. Is the issuance of the RMB based on the US dollar or land: link

10. Latest report from “Financial Times” - How to invest in a high interest rate environment: link

RMB’s rebound may not be particularly strong in the medium to long term.

The basic reason, of course, is that the US interest rate hike is coming to an end. Even if there is a rate hike, there will be at most one or two more times. Based on historical experience, the Federal Reserve will start a rate cut cycle within six months after the end of the rate hike cycle. Therefore, the days of the US dollar tightening are clearly over. The expectation of the US dollar depreciation has increased, and other currencies have entered the appreciation space accordingly. Starting from the recent low, the Chinese yuan and the Japanese yen have risen by 3%, while the euro has risen by more than 4%.

The second significant reason is that it is nearing the end of the year, and foreign trade enterprises are entering the stage of concentrated settlement. Many foreign trade enterprises that converted their money into US dollars to earn interest in the first half of the year will need to sell US dollars (exchange other currencies) in the market for non-dollar settlements. This will cause a significant increase in the supply of US dollars in the market in the short term, leading to a decline in its value.

At the same time, our central bank often intervenes in the foreign exchange market at the end of the year. For example, from this time last year to the beginning of this year, the Chinese yuan still achieved a strong rebound against the pressure of the US dollar’s accelerating rate hike, and the exchange rate of the US dollar against the yuan fell from 7.32 to 6.69 at one point. This is because the appreciation of the Chinese yuan is beneficial for the GDP priced in US dollars to achieve a higher nominal growth rate, so the central bank tends to sell US dollars as the year-end approaches.

However, whether the Chinese yuan will continue to appreciate in the medium to long term is still a big question mark:

Firstly, we have accelerated the pace of rate cuts since June this year. It should be noted that once loose monetary policy is implemented, it will last for a long period of time, just like the US dollar’s rate hike cycle that lasted for over a year. And currently, our monetary policy has not significantly stimulated the recovery of the real economy, because the pace of monetary easing will continue to be intensified. In the future, the supply of the Chinese yuan may even exceed expectations, and the yuan will face depreciation pressure accordingly.

Secondly, if the speed of our rate cuts in the next year exceeds the speed of the Federal Reserve’s next round of rate cuts, then the supply of the Chinese yuan will still increase relative to the US dollar, and the depreciation pressure on the yuan will remain significant.

Lastly, looking at the flow of the Chinese yuan, the liquidity released through loose monetary policy has not flowed into the real economy in large quantities. Instead, it has been idle in the financial system (high M2 growth, but deposit volume is also high). The currency we released does not have a widespread value bearer, and the exchange rate risk will consequently increase.

Therefore, in the medium to long term, the rebound of the Chinese yuan may not be particularly strong.

人民币升值预期与美国降息相关- RMB appreciation expectation tied to US rate cuts

I have been saying since June this year that it’s not the depreciation of the Chinese yuan, but rather the appreciation of the US dollar that makes the yuan depreciate. And the reason for the appreciation of the US dollar is that they have been raising interest rates.

However, there is always a limit, and the reasonable lower limit for the yuan is 7.2, with the extreme lower limit being 7.4.

For now, it seems to be holding steady.

When will the yuan start to appreciate? My view is that it will start to appreciate when the US cuts interest rates. Of course, the financial market speculates on expectations, and it will not wait until the day of rate cuts to start appreciating. As long as there is an expectation of rate cuts, the yuan will start to appreciate.

So, is there an expectation of rate cuts now? In fact, there isn’t yet. I estimate that rate cuts will not happen until at least the first quarter of next year, or even the second quarter.

Therefore, the current appreciation of the yuan is primarily a return to a reasonable valuation, which is what I mentioned as the extreme lower limit of 7.2. Previously, breaking through 7.2 was a bit overreacting.

I expect that it will take some time to fluctuate between 7 and 7.2. If US inflation can be controlled as expected, which is not necessarily what the Federal Reserve wants, achieving a true 2%, it will be very difficult. I believe if inflation can stabilize at 3%, the Federal Reserve will be eager to cut interest rates. Because the financing cost in the US is really unsustainable, with trillions of dollars in national debt waiting to be replaced, a 5% interest rate is too frightening.

Therefore, as long as inflation can be kept below 3% for three consecutive months, the Federal Reserve will have a strong incentive to cut interest rates. At that time, the yuan will break through the 7 level, and it’s possible it could reach below 6.5 before the end of next year. Of course, this is a bit far off, so I won’t draw conclusions yet. But it’s certain that it will be below 7 by the second quarter of next year.

The Future of RMB and Factors Influencing Its Rise

The first victory demonstrates the strength of a great nation.

We simply want to tell the world, especially the Western international market, that we have control over the exchange rate of the Chinese currency. The fluctuations are just a way for us to weigh the pros and cons of our international trade.

Strong as he may be, the gentle wind brushes the mountains. Do you remember this saying?

Do not underestimate the wisdom and strategies of the Chinese people!

About the future trend of the Renminbi? A personal bold speculation.

Currently, the market is driven mainly by sentiment, rather than any substantial and sustainable signals of economic shift. Therefore, in the short term, the RMB exchange rate against the US dollar is expected to fluctuate around 7.20 yuan. By the middle of next year, the exchange rate is expected to reach 6.9 yuan. However, even if the Federal Reserve begins to cut interest rates, I conservatively estimate that we will still maintain control over the exchange rate between 6.8 and 7 yuan. This is because our current domestic economic circulation is unable to stimulate employment and domestic demand, and only by vigorously developing foreign trade can we fundamentally change our current predicament.

What do you think? If you have different opinions, let’s discuss them in the comments.

The appreciation of the Renminbi this time is mainly a violent surge driven by sentiment. There are several reasons for this:

1. The Federal Reserve’s suspension of interest rate hikes directly removes strong support for the US dollar.

2. When both currencies maintain extreme trends for a long time, they are easily stimulated to experience sharp rises and falls due to news.

The following two news items have further intensified market sentiment:

3. On the evening of November 17th, the People’s Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission jointly held a symposium on financial institutions, discussing key work such as the financial risks of real estate, credit expansion, and the resolution of financing platform debt risks. This measure has provided substantial confidence to the market.

4. The Consumer Price Index (CPI) for October released on the 14th showed that the year-on-year growth rate of CPI slowed to 3.2%, while the core CPI increased by 0.2% from the previous month, a decrease of 0.1 percentage points. The Producer Price Index (PPI) announced on the 15th reached the largest decline in three and a half years. Retail sales in October fell 0.1% from the previous month, marking the first decline in seven months. Signs of a cooling job market continue to strengthen. Controlling domestic inflation in the United States means that the Federal Reserve is not far from cutting interest rates in the future.

To grasp the shift of the era across social classes, we must understand the laws of the economic orientation of the era’s development.

A small story can also illustrate the overall trend:

The village chief proposed to build a road. First, he gathered everyone together and promoted the important idea of getting rich by building roads. Afterwards, he asked everyone to contribute money and effort. However, at this time, everyone was thinking, “I’ve contributed money and effort, but the benefits are not clearly reflected for myself. What if we run out of money halfway through the construction? Then our money will be wasted.” Therefore, the stimulus effect was not strong, and everyone was waiting for the leader to take the lead, waiting for the recognition of being a model student, and waiting to maximize their own interests. As the deadline for the road construction task issued by the county approached, the village chief had no choice but to ask the village accountant to use the village’s emergency funds, and he himself contributed money along with the village staff, and provided certain special benefits to the local finances. Finally, the road was successfully built.

There are several key factors here:

1. If people are convinced that getting rich depends on building roads.

2. When the effect of mobilization is not significant, but road construction is currently a task that must be completed, there will be more and more measures taken to mobilize road construction until the road is built.

3. The village’s finances and officials contributed money, and they certainly won’t let their money go to waste, even though they know it’s just an excuse to make everyone contribute money. But at least they are actually contributing money.

4. Next, construction workers and road construction equipment will be brought in for construction. When everyone sees the progress of road construction day by day, they will naturally be more willing to contribute money and effort because they can see the results.

5. It is reasonable to provide appropriate rewards to the leading contributors, as they play a model role during a special period.

As Expected: Understanding Logic, Everything Falls into Place.

Thank you for the invitation, everything is as expected. Once you understand the logic, everything falls into place naturally.

Devaluation of Chinese yuan due to concerns over domestic real estate market.

After the Plaza Accord, the Japanese yen appreciated by nearly three times its original value. Similarly, as China also experiences a large trade surplus, a significant appreciation of the renminbi would be the most likely scenario. This year, the renminbi had currency swaps with many countries including Saudi Arabia, Argentina, and Brazil. It was widely anticipated that the renminbi would strengthen, but unexpectedly, it depreciated to 7.30. This was mainly due to factors such as a significant increase in US interest rates and concerns about the domestic real estate market. If domestic demand does not pick up and China continues to heavily rely on external markets, then the renminbi will not truly appreciate.

RMB’s Strength: Factors and Impact

Isn’t this a return to normal channels? Why has it turned into a strong appreciation?

Take a look at the exchange rate trend chart. The RMB itself has been oscillating within this range.

Previously, the US dollar appreciated against the whole world because they were resorting to desperate measures to sustain such high interest rates. They may not even be able to afford their own national debt interest payments.

There are only a few reasons for this rebound in the RMB:

1. Our economic recovery is progressing relatively well.

2. The rapid weakening of US Treasury bonds is affecting the weakening of the US dollar.

3. It’s nearing the end of the year, and many institutions need to settle their overseas earnings.