Rare Significant Appreciation
On Friday, the central parity exchange rate of the Renminbi against the US Dollar unexpectedly surged by 192 points, following a rise of 90 basis points from the previous trading day, reaching 6.7625 Yuan per US Dollar, a record high since the exchange rate reform. On Monday, the exchange rate jumped again, surprising market participants as the Renminbi jumped 116 basis points against the US Dollar, breaking through the 6.76 Yuan level, closing at 6.7509 Yuan per US Dollar. This marks the second consecutive trading day of record highs since the exchange rate reform, with a total increase of 398 basis points over three trading days since September 8.
Regarding the rare significant appreciation of the Renminbi, Li Bing, head of the Foreign Exchange Department of Bank of Communications Chengdu Branch, believes that the recent weakening of the US Dollar, alongside the upcoming US midterm elections, has put political pressure on the Renminbi exchange rate; in addition, China's economic data has been performing well, with a slight rise in inflation. He suggests that the appreciation of the Renminbi could serve multiple benefits and partially offset some imported inflationary pressures.
“The fluctuations in recent days do not have directional significance,” said Liu Weiming, a foreign exchange expert from China Citic Bank. The fluctuation range over the past three days has not exceeded the levels since the resumption of the exchange rate reform and does not signal a rapid unilateral appreciation of the Renminbi. “On one hand, global economic recovery is not very pronounced, while on the other, although foreign trade data is relatively good, the uncertainty of the external environment may lead to a decline in external demand,” he believes that the Renminbi will continue to experience two-way fluctuations with a gradual appreciation process in the future.
Sichuan Export Enterprises Remain Calm
What Impact Does the Rare Surge of the Renminbi Have on Sichuan Export Enterprises?
“It does not have much impact on us,” said Jiang Zongyong, chairman of Chengdu Fulqi Shoe Industry Co., Ltd. in an interview yesterday. He stated that the overall exchange rate has remained stable this year, and the short-term jump in the Renminbi to US Dollar exchange rate does not significantly affect the company's exports.
Meanwhile, Yang Yi, head of the export department of another large exporting company, Chengdu Engineering Machinery Co., Ltd., indicated that the appreciation of the Renminbi has some financial impact on the enterprise, but it is not significant. Yang mentioned, “For example, when negotiating with foreign merchants last month, we set a relatively high exchange rate, but at the time of settlement, if the Renminbi appreciates significantly, the company's income will shrink, which becomes part of the financial risk.”
However, Yang stated that after experiencing significant appreciation of the Renminbi in 2007 and 2008, Sichuan foreign trade enterprises now have various ways to hedge foreign exchange risks, “For instance, we can agree on a settlement exchange rate to effectively lock in risks; and for forward settlements with greater uncertainty, we generally use bank tools to lock in those risks, as WorldWay requires consideration of currency risks and should be approached correctly.
Gong Fangxiong Forecasts Annual Renminbi Appreciation of 3% to 5% Over the Next 3 to 5 Years
Yesterday, Gong Fangxiong, Vice Chairman of JPMorgan's China Investment Banking, attended the “Media Roundtable on Renminbi Cross-Border Trade Settlement” held by JPMorgan Chengdu Branch, expressing his expectation that by the end of the year, the Renminbi to US Dollar exchange rate will appreciate to the level of 6.6 or 6.7. Over the next 3 to 5 years, the Renminbi is expected to have an annual appreciation potential of about 3% to 5%. He believes that promoting Renminbi settlement in cross-border trade is the first step towards the internationalization of the Renminbi, which is currently on a long-term, progressive appreciation path.
Gong Fangxiong indicated that after the financial crisis, the major currencies of developed countries, including the US Dollar, Euro, and Japanese Yen, have all faced issues, and there is a global desire for a new international reserve currency to emerge. With the rise of the Chinese economy, the position of the Renminbi in the world has also correspondingly improved.
“The internationalization of the Renminbi is a major trend and a significant movement, but an internationalized currency cannot achieve this overnight. The ultimate goal of comprehensive internationalization of the Renminbi must be accompanied by full circulation of the Renminbi, opening up capital accounts, and convertibility of the currency.” Gong believes that the process of Renminbi internationalization needs to take into account national policies, and there should be substantial progress in the opening of China's capital account over the next 3 to 5 years. Whether capital account controls will be lifted after 5 years will depend on China's overall macroeconomic conditions, global economy, and financial market situation at that time.