COVID-19 and exchange rate for China economy

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The Chinese yuan has appreciated against the U.S. dollar. Since the end of June, the renminbi has appreciated by 4.5%, and 1 U.S. dollar has been exchanged for 6.7566 yuan. This is the largest quarterly increase since 1981. Analysts believe that the appreciation of the renminbi is related to the stability of the Chinese economy and the results of the successful response to the new crown epidemic, especially compared with Western countries, including the United States. If we say that the Chinese government had tried to prevent the renminbi from appreciating too quickly, but now the situation has changed.

RMB is not a convertible currency. The People’s Bank of China publishes RMB exchange rate guidelines every day. However, the actual exchange rate may fluctuate by 2%. The People’s Bank of China has quite a few tools to control the RMB exchange rate. If the renminbi appreciates excessively, the central bank will intervene currency so that exporters will not get into trouble. For example, when the Sino-US trade war has intensified, the RMB exchange rate has been hovering around 7 RMB, but it does not cross the psychological threshold. Of course, the Chinese government later decided to protect foreign exchange reserves and let the RMB exchange rate fall. Interestingly, the United States at the time accused it of being able to depress the renminbi exchange rate, even though the renminbi fell under the adverse influence of market trends.

The current situation is reversed. Compared with other countries, China has responded better to the new crown epidemic. According to data from the International Monetary Fund, according to the 2020 results, China will become the only economic growth country. The August data is optimistic. According to statistics, retail sales are 3.36 trillion yuan, an increase of 0.5% over a year ago. China’s merchandise exports are also increasing. The value of exports in August increased by 13.7% year-on-year: more than twice that of a month ago. As a result, the current account surplus was $119.6 billion. For comparison, the index was 30.52 billion US dollars a year ago. The current account surplus drives the exchange rate rise. You must know that China is the least dependent on foreign exchange. Xu Qiyuan, a researcher at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, pointed out in an interview with the Satellite News Agency that basic economic data has an impact on currencies. Therefore, under the current circumstances, the RMB exchange rate rises in accordance with the law.

He said: “The current strengthening of the renminbi is related to the dollar cycle, but also to the relatively good performance of China’s economy under the impact of the epidemic. The exchange rate changes have a certain cyclical nature. It is expected that the current round of the strong renminbi against the dollar will continue. A few years. And the new development pattern of dual-circulation mutual promotion with domestic circulation as the main body is a medium and long-term development idea, which will guide economic work in the 14th Five-Year Plan period at least, even longer. This time span is longer than China’s macroeconomic cycle or the cycle of exchange rate changes. And in the medium and long term, there are other factors that affect the RMB exchange rate, such as population structure, national net savings, and balance of payments.”

The Chinese government’s announcement of the “dual circular” economic strategy is a response to the status quo of the international economy and trade. According to this strategy, the domestic market and consumption will become the main engine of China’s GDP growth in the future. At the same time, the economy is not closed. The external situation, namely exports, should provide support for domestic development. In the context of a decline in world demand due to the crisis, some countries are pursuing policies of unilateralism, trade and technological protectionism. Therefore, it is completely logical to reduce dependence on the external market.

If the target turns to domestic demand, cheap imports are the right time. In addition, the threat of financial sanctions in Western countries has also forced China to think about reducing its dependence on the US dollar for international settlement. As a member of the Xu Qiyuan Research Institute, the appreciation of the renminbi also has a positive impact on the internationalization of the national currency.

He said: “The appreciation of the RMB exchange rate is of course pros and cons, but compared with the rigid exchange rate formation mechanism under government intervention, the current appreciation of the RMB exchange rate basically reflects the fundamentals of China’s economy and is consistent with the overall weakening of the US dollar index. In the next few years, the renminbi is expected to remain stable overall and even strengthen against the U.S. dollar. This will help promote the cross-border use of renminbi, especially for foreign investors to choose renminbi as an asset to hold.”

As Western countries implement zero interest rates, the Chinese debt market is very attractive to investors. In July, the net capital of foreign capital entering China’s debt market was 21.3 billion U.S. dollars, which was the highest value since the release of statistics in 2014. The total value of national debt held by foreign investors has reached 36 billion U.S. dollars, which is 13.7% more than a year ago. According to analyst estimates, the total amount of foreign investment this year will be 150 billion U.S. dollars. During the period 2021-2030, the annual growth rate will be 200-300 billion US dollars. Considering that the Chinese government, like investors, is interested in attracting capital and opening up its financial markets, it is possible that in the future, most of the world’s assets will be denominated in RMB.

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