Chinese yuan- US dollar

The Impact of RMB Exchange Rate Changes on China’s Economy

Since November 17, the Chinese yuan (RMB) against the U.S. dollar (USD) has shown a strong rebound trend, with the onshore RMB-to-USD spot exchange rate rising above the 7.13 level by one point, closing at 7.1338, marking a nearly four-month high since July 27.

The offshore exchange rate, reflecting international investors’ expectations, has also risen for three consecutive trading days, reaching a high of 7.1300. The RMB’s continuous appreciation is reminiscent of last year’s rapid rise in the offshore RMB exchange rate, dropping from 7.33 at October’s end to below 7.

The stabilization of China’s economic situation since the third quarter, signals of stability in U.S.-China relations, and weakening expectations of the Federal Reserve’s interest rate hike have collectively driven the rebound of the RMB exchange rate. The meeting between Chinese and U.S. leaders indicates stability in bilateral relations, easing geopolitical risks. Although not fully eased, the relationship is trending towards stability, reducing uncertainty.

The slowdown in the U.S. economy has decreased the likelihood of the Fed continuing to raise interest rates, leading to the decline of the U.S. dollar index and the possibility of an expansion of the interest rate differential between China and the U.S., which is favorable for the recovery of the RMB exchange rate. Researchers at ANBOUND believe that the changes in China’s economic situation are the foundation determining the RMB exchange rate.

Foreign institutions have raised expectations for China’s economic growth, leading to increased foreign capital flow into the Chinese bond market and increasing the demand for the RMB. Year-end foreign trade settlement demand has also driven short-term demand for the Chinese currency, causing the exchange rate to exhibit a cyclical rebound.

However, the economic situation has undergone substantial changes, and the post-pandemic recovery process is complex, adding to the difficulty of economic expectations. The foreign trade situation has also changed, with a prolonged period of negative domestic export growth, putting greater pressure on the exchange rate.

The RMB’s depreciation in the second half of the year is attributed to increased capital outflow and geopolitical competition between the US and China, increasing uncertainties. Since the pandemic, the RMB exchange rate has consistently exhibited a roller-coaster trend, introducing instability factors for both the Chinese economy and financial markets.

The RMB’s depreciation this year has not improved exports or attracted more direct investment, causing significant disruption to the Chinese capital market. To ensure economic stability and prevent systemic risks, the RMB’s stability is crucial. However, due to internal and external uncertainties, the RMB exchange rate is unlikely to form a trend expectation for long.

The Chinese economy has stabilized and is still aiming for a 5% growth target, but lacks sustained internal growth momentum. Risks in real estate remain, potentially impacting economic stability. Despite U.S.-China relations stabilization, low-level stability is susceptible to disruption, and geopolitical risks will not disappear.

The positive impact of the Fed’s policy shift may become a secondary consideration. The increase in uncertainties in the RMB exchange rate is primarily due to changing expectations caused by shifts in domestic economic fundamentals. As economic fluctuations intensify and uncertainties grow, predicting economic growth becomes increasingly challenging, leading to increased cyclical fluctuations of the Chinese currency.