On the 16th, the offshore yuan-dollar exchange rate fell below 7.33, marking a continuous five-day decline of over 800 basis points and hitting a new low since November last year. Onshore yuan exchange rates also hovered around the 7.3 mark.
Due to exchange rate fluctuations, the costs of studying abroad and overseas shopping have increased. Exchanging $10,000 now costs about 4,000 yuan more compared to half a year ago. However, the rate decline also brings positive effects for exports.
How to Interpret the Current Exchange Rate Fluctuation?
In fact, the yuan-dollar exchange rate has been on a downward trend for some time this year, with offshore and onshore rates depreciating from around 6.8 at the beginning of the year to the current 7.3 level.
The current yuan exchange rate changes result from a combination of domestic and international factors. Analysis from Shenwan Hongyuan Macro states that although the recent yuan depreciation against the dollar has occurred, it mainly stems from the rapid rise of the dollar index rather than unilateral weakening of the yuan.
Data from Wind shows that in August, the dollar index rose consecutively, reattaining the level of 103. Analyst Zhou Maohua, a macro researcher in the Financial Market Department at Everbright Bank, mentioned that the dollar’s rebound disturbs the yuan exchange rate, but the yuan’s rate against a basket of currencies appreciates.
Moreover, influenced by factors such as the reduction of MLF (Medium-Term Lending Facility) rates and reverse repo rates on the 15th and recent economic data, the yuan exchange rate fell to a new low for the year.
China Securities noted that rate reductions might deepen the degree of an inverted China-US interest rate differential, potentially leading to some capital outflows and increasing pressure for yuan depreciation. However, if rate cuts and other policies can stabilize the economy, the exchange rate is expected to naturally stabilize and rebound.
What Are the Effects of Current Exchange Rate Fluctuations?
With the approaching fall semester in the United States, the depreciation of the yuan against the dollar has affected the costs of studying in California. Jiaying (pseudonym), who studies there, found that this semester’s tuition is about 15,000 yuan higher than the previous one. Moreover, living expenses and rent also require more yuan.
“Cross-border shopping and U.S. proxy purchasing are also affected.” Amid exchange rate fluctuations, many consumers have noticed an increase in costs when shopping on American websites.
However, the yuan depreciation against the dollar is favorable for China’s goods exports. Wang Youxin, a senior researcher at Bank of China, stated to China News Finance that the rate decline will boost exports, enhance the competitiveness of export products’ prices, stabilize export market shares, and to some extent, improve the international balance of payments.
Wang Youxin also mentioned that this should not be overinterpreted, as the pressures faced by the export sector are a global phenomenon. Fundamentally, it is a result of the current global economic slowdown and weak external demand. The second half of the year is predicted to see further economic downturn pressure in major developed economies like Europe and the U.S., and the overall external demand situation remains less than ideal. Apart from utilizing exchange rates’ regulatory role on international balance of payments, it may also require a combination of other measures to stabilize foreign trade and stimulate exports.
What Other Reserves Are in the “Toolbox” for Exchange Rate Stability?
Maintaining exchange rate stability is currently an important topic. The Central Political Bureau meeting held in July emphasized maintaining the yuan exchange rate at a reasonable and balanced level. The central bank also stressed the need to “prevent exchange rate fluctuations.”
“At present, regulatory authorities have implemented counter-cyclical management through means such as issuing offshore central bank bills and adjusting macro-prudential regulatory parameters for cross-border financing.” Wang Youxin mentioned that, based on past experiences, China’s macro-prudential policy tool system is very comprehensive, with rich policy tool reserves. If necessary, expectations guidance, adjustments to forward sales risk reserve ratio, foreign exchange deposit reserve ratio, macro-prudential regulatory parameters for overseas corporate loans, cross-border financing macro leverage ratio, and other tools can be considered.
Pang Ming, Chief Economist and Head of Research Department at Cushman & Wakefield Greater China, stated to the media that considering the Fed’s rate hikes are nearing completion, China’s macroeconomic foundation is strong, its strength is robust, and it is confident. The foreign exchange policy toolbox is diverse and complete. It is expected that 7.3 will be the lowest point for the yuan in the third quarter.
“The subsequent exchange rate trend will continue to be influenced by the U.S. dollar index, the economic performance and policy direction of other major economies, and China’s macroeconomic fundamentals. Although there will still be some volatility, the yuan exchange rate will continue to maintain basic stability at a reasonable and balanced level.”
