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Trend and New Normal of RMB Exchange Rates

Apr 08-2021   



In the 14th Five-Year Plan period, the Chinese currency will take on an appreciative trend thanks to endogenous strength originating from the buttressing force of various fundamental factors; meanwhile, conspicuous fluctuations are likely to occur along this upward trajectory due to some disruptive factors, said Prof. Lu Feng of the NSD in the 56th edition of China Economic Observation, a signature seminar of the NSD.

 

One driving force behind the expected RMB appreciation is China’s rapid economic growth over the long term. In its 2020 autumn projections, the IMF put China’s GDP at USD23.03 trillion in 2025, or 89.32% of the US total, and estimated China’s annual GDP growth (in US dollar) at 4.5%. Over the next five years, the Chinese economy is expected to grow at a significantly faster pace than the American one, which is favorable for RMB appreciation. The IMF projections also relied on the embedded hypothesis that the RMB would have an actual value gain of 1.5% against the greenback.

 

Two other major factors will also lead to RMB appreciation, said Prof. Lu. One is the continual productivity gains of tradable goods department. In 2020 the Chinese currency appreciated strongly, due to effective pandemic control and ebullient export growth, as well as the accumulative effect of productivity gains of tradable goods department in the previous years. In the 13th Five-Year Plan period, RMB exchange rates were subject to some constraints, which are likely to be removed in the future. Another positive factor for RMB appreciation is the increase in cross-border capital inflow. China’s serial reforms have rendered its domestic assets more attractive to foreign investors and lowered the trading costs for foreign capital. The inclusion of China’s A shares and bond markets into mainstream international indexes has also facilitated the influx of foreign capital and exerted conspicuous influence on RMB exchange rates.

 

Some uncertainties and constraints might still disrupt RMB exchange rates. The most significant one is the demand and desire to move capital out of China as its economy goes through a transitional period. The exact magnitude of capital outflow is hard to quantify, said Prof. Lu, for it consists of the global development and investment of companies, the logical demand of wealthy residents to invest in overseas assets, and short-term capital outflow caused by shifting expectations of Chinese residents.

 

Moreover, abnormal price fluctuations of domestic assets, especially the fast rise of housing prices in large cities due to the structural issues of the real estate market, might further augment capital outflow. Furthermore, as US dollar indexes undergo cyclical shifts, the RMB might face downward pressures.

 

The overlapping of significant exchange rate fluctuations and an appreciative trend might become the new normal, something unseen in the RMB's exchange rate trajectory over the last 40 years. Such co-existence could be the normative form in the fifth phase of RMB exchange rate evolution, said Prof. Lu.

Trend and New Normal of RMB Exchange Rates

Apr 08-2021   



In the 14th Five-Year Plan period, the Chinese currency will take on an appreciative trend thanks to endogenous strength originating from the buttressing force of various fundamental factors; meanwhile, conspicuous fluctuations are likely to occur along this upward trajectory due to some disruptive factors, said Prof. Lu Feng of the NSD in the 56th edition of China Economic Observation, a signature seminar of the NSD.

 

One driving force behind the expected RMB appreciation is China’s rapid economic growth over the long term. In its 2020 autumn projections, the IMF put China’s GDP at USD23.03 trillion in 2025, or 89.32% of the US total, and estimated China’s annual GDP growth (in US dollar) at 4.5%. Over the next five years, the Chinese economy is expected to grow at a significantly faster pace than the American one, which is favorable for RMB appreciation. The IMF projections also relied on the embedded hypothesis that the RMB would have an actual value gain of 1.5% against the greenback.

 

Two other major factors will also lead to RMB appreciation, said Prof. Lu. One is the continual productivity gains of tradable goods department. In 2020 the Chinese currency appreciated strongly, due to effective pandemic control and ebullient export growth, as well as the accumulative effect of productivity gains of tradable goods department in the previous years. In the 13th Five-Year Plan period, RMB exchange rates were subject to some constraints, which are likely to be removed in the future. Another positive factor for RMB appreciation is the increase in cross-border capital inflow. China’s serial reforms have rendered its domestic assets more attractive to foreign investors and lowered the trading costs for foreign capital. The inclusion of China’s A shares and bond markets into mainstream international indexes has also facilitated the influx of foreign capital and exerted conspicuous influence on RMB exchange rates.

 

Some uncertainties and constraints might still disrupt RMB exchange rates. The most significant one is the demand and desire to move capital out of China as its economy goes through a transitional period. The exact magnitude of capital outflow is hard to quantify, said Prof. Lu, for it consists of the global development and investment of companies, the logical demand of wealthy residents to invest in overseas assets, and short-term capital outflow caused by shifting expectations of Chinese residents.

 

Moreover, abnormal price fluctuations of domestic assets, especially the fast rise of housing prices in large cities due to the structural issues of the real estate market, might further augment capital outflow. Furthermore, as US dollar indexes undergo cyclical shifts, the RMB might face downward pressures.

 

The overlapping of significant exchange rate fluctuations and an appreciative trend might become the new normal, something unseen in the RMB's exchange rate trajectory over the last 40 years. Such co-existence could be the normative form in the fifth phase of RMB exchange rate evolution, said Prof. Lu.