Starting Wednesday, September 15 (local time), the U.S. Congress will hold a two-day hearing on the issue of the RMB exchange rate. As the countdown to this event begins, the central parity rate of the RMB against the U.S. dollar was set at 6.7378 yesterday (September 14), marking a new high since the exchange rate reform for the third consecutive trading day. In the spot inquiry trading system, the RMB against the U.S. dollar even hit a new high of 6.7435, the highest level since 1993.
RMB Hits New High Since 2005
On the eve of the U.S. Congressional hearing on the RMB exchange rate, the central parity rate of the RMB against the U.S. dollar appreciated by 131 basis points to 6.7378 yesterday, setting a new high since the 2005 exchange rate reform for the third consecutive trading day. In the previous two trading days, the RMB central parity rate had appreciated by 140 basis points and 80 basis points, respectively, compared to the previous trading day.
Data released by the China Foreign Exchange Trade System authorized by the People's Bank of China shows that in the spot inquiry trading market, the last transaction price of the RMB against the U.S. dollar was 6.7463, an appreciation of 155 basis points from the previous day's closing price of 6.7618, also marking a new high since the RMB exchange rate stopped pegging to the U.S. dollar in July 2005.
Throughout yesterday, the RMB against the U.S. dollar reached a high of 6.7435, the highest level since the People's Bank of China unified the official exchange rate and the foreign exchange swap rate in 1993, with a low of 6.7550.
Statistical data shows that the RMB against the U.S. dollar has appreciated by 0.5% over the past three trading days. In contrast, earlier in September, the RMB exchange rate against the U.S. dollar had been hovering around 6.80.
On September 2, the spot exchange rate of the RMB against the U.S. dollar once dipped to 6.8196, a new low in over two months, with the previous low being 6.8208 recorded on June 23.
Historical data shows that starting Monday, September 6, the RMB exchange rate against the U.S. dollar began to move away from the "summer trend," with the central parity rate hitting a three-week high, driving the RMB exchange rate to strengthen. In the following two trading days, due to the short-term strengthening of the U.S. dollar, the RMB central parity rate fell from a one-month high until last Thursday, when a weaker U.S. dollar trend drove the RMB central parity rate up by 90 basis points.
In the overseas non-deliverable forward (NDF) market, as of 17:36 Beijing time, the one-year USD/RMB NDF was quoted at 6.6550, compared to 6.6434 at the close of the previous day. Yesterday, it fell to a low of 6.6297 during the session, with the previous low being 6.6150, a more than two-month low recorded at the end of June.
Pressure from U.S. Appreciation Not Ruled Out
A foreign exchange trader at a bank in East China stated that the recent appreciation of the RMB has been "outrageously" fast, and it cannot be ruled out that this is due to political pressure from the United States.
"The large spread between the inquiry and bidding prices during the session shows that the market is cautious about the RMB central parity rate repeatedly hitting new highs," the person mentioned above said.
Starting Wednesday, September 15 (local time), the U.S. House Ways and Means Committee will hold a two-day hearing on China's exchange rate policy.
It is reported that the focus of this hearing is whether China has made "substantial" progress on the issue of RMB appreciation against the U.S. dollar. The meeting notice for the hearing states that since China announced the further promotion of the RMB exchange rate formation mechanism reform on June 19, the appreciation of the RMB has been less than 1%. The purpose of this week's hearing is to consider what measures the U.S. Congress and government need to take regarding the RMB exchange rate, while assessing the impact of these measures on U.S. job creation and global economic recovery.
U.S. Treasury Secretary Geithner will attend the hearing on Thursday to present the Obama administration's latest views on pressuring China regarding its exchange rate reform. Geithner has previously publicly stated that China has done "very, very little" on the exchange rate issue and needs to allow the RMB to appreciate over a sustained period.
According to overseas media reports, U.S. Representatives maintained a tough stance on RMB appreciation on the eve of the hearing, even "deliberately" drafting a joint letter signed by 93 U.S. Representatives, urging House Democratic leaders to vote on a bill.
The main content of the aforementioned bill is to allow the U.S. Department of Commerce to "impose countervailing duties and anti-dumping duties on unfair imports from any country that persistently undervalues its currency."
Chinese Premier Wen Jiabao stated at the Davos Forum in Tianjin this Monday (September 13): "Over the past two years, under extremely difficult and complex circumstances, China was the first in the world to achieve economic recovery and maintain stable and relatively fast economic development. This is the result of our comprehensive implementation of a package plan."
This has been interpreted by the market as a sign that a "soft landing" for the Chinese economy is a foregone conclusion, and the authorities will further accelerate the pace of RMB appreciation.
Dr. Shen Jianguang, Chief Economist for Mizuho Securities Asia, stated that the dual factors of a high trade surplus and more relaxed capital controls will prompt further appreciation of the RMB against the U.S. dollar and a basket of currencies in the future.
Shen Jianguang analyzed that although the current trade surplus has declined due to China's import data in August performing better than exports, it remains at a high level of $20 billion. In recent months, China's trade balance has maintained a stable high surplus, and market data shows that this has already created pressure for RMB appreciation.
Shen Jianguang further pointed out that the strong foreign trade data in August reflects robust domestic and international demand, and also indicates that the risk of a "double-dip" in the global economy, including China, has decreased. As market concerns about a "hard landing" for China gradually fade, policymakers may allow the RMB to appreciate further.
In addition, the People's Bank of China has already taken important steps in relaxing capital controls and achieving RMB liberalization, such as allowing export earnings in some regions to be deposited overseas, opening the RMB bond market to foreign investors, and opening channels for RMB repatriation. Free cross-border capital flows require a more flexible exchange rate policy.
Shen Jianguang predicts that as the U.S. dollar is expected to weaken against the Euro and the Japanese Yen in the coming months, the RMB against the U.S. dollar may reach 6.6 by the end of the year. In this way, the cost of investing in U.S. EB-5 projects will be further reduced.
