China-Singapore Jingwei, December 29 Question: The RMB exchange rate is expected to rise to within "7".
Author: Xiao Lisheng, Chief Economist of Q9 and Director of the Global Macroeconomic Research Office of the Institute of World Economics and Politics of the Chinese Academy of Social Sciences.
Li Xiaojian is a macro researcher at Jiufang Institute of Finance.
In mid-January 2023, the offshore USD/CNY exchange rate rose to 67, but since then, the trend of the RMB exchange rate has been significantly lower than market expectations, and the offshore US dollar against the RMB exchange rate once fell to 7 during the year35 nearby. Although the performance has improved after the fourth quarter, it has not recovered 70 pass.
The difference between economic fundamentals and monetary policy is a key factor in determining the trend of the exchange rate in the medium and long term, and the RMB exchange rate is no exception. From a fundamental point of view, the resilience of the US economy since 2023 has repeatedly exceeded expectations: according to the Federal Reserve's December report**, the US real GDP (gross domestic product) growth rate for the whole of 2023 may reach 26%, while the Fed's ** value at the end of 2022 was only 05%。In the first three quarters of 2023, China's real GDP grew by 5% year-on-year2%, the annual growth rate may be slightly more than 5%. The economic growth gap between China and the United States is at its lowest level in the past three decades. However, judging from the data of recent months, the US job market has begun to show signs of weakening, and household savings have gradually returned to pre-pandemic levels. Entering 2024, the U.S. economy is likely to continue the current cooling trend, and with the support of policies, the signs of China's economic recovery may be more obvious, and the macroeconomic pattern of "rising in the east and falling in the west" is undoubtedly a strong support for the appreciation of the RMB.
In terms of monetary policy, the Fed's pivot will also be positive for the RMB exchange rate while suppressing the dollar index. The Fed raised interest rates four times in 2023, raising the policy rate by 100bp (basis points). The dot plot released at the Federal Reserve interest rate meeting in December shows that the Fed will shift from raising interest rates to cutting interest rates in 2024, and may cut interest rates three times throughout the year for a total of 75bp. Historically, a change in the Fed's monetary policy stance has often led to a reversal in the U.S. dollar index. With the start of the Fed's interest rate cut cycle, the previously strong dollar index may weaken, and the strong dollar will significantly reduce the pressure on the RMB exchange rate.
Based on the above two factors, the narrowing of the gap between the economic fundamentals and monetary policies of China and the United States is relatively certain, and the RMB exchange rate will also benefit from this. Therefore, after a period of **, the RMB exchange rate may usher in a new round of appreciation, and the USD/RMB exchange rate is expected to rise to within "7" in 2024.
It should be noted that the RMB exchange rate may face the following risks in the process of appreciation: First, although the market and the Fed have reached a consensus on the monetary policy shift, the market may be too optimistic about the extent of interest rate cuts. If the Fed's interest rate cut in the first half of 2024 is delayed, it may lead to a phased** dollar index and suppress the RMB exchange rate. Second, the current core inflation in the United States is falling slowly, and from the perspective of leading indicators such as housing prices, there is a risk of a second rebound in housing rents and other sub-items at the end of 2024, which will also affect the trend of the US dollar index and the RMB exchange rate. Third, the foundation of China's economic recovery is still not solid enough, and the RMB exchange rate may be disturbed to a certain extent. (Zhongxin Jingwei app).
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