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Need to curb RMB's fast appreciation rate

2021-01-05

According to the World Bank, China's economy is expected to grow 7.9 percent in 2021, which will no doubt accelerate the purchase of renminbi-dominated assets by overseas investors, further appreciating the Chinese currency, especially as it rises above 6.50 against the US dollar.

Some overseas institutions estimate that the RMB could appreciate another 10 percent to 6 or even higher against the dollar by the end of 2021. According to the Central Economic Work Conference in December 2020, keeping the RMB's exchange rate basically stable within an appropriate and balanced range is one of the key economic goals for 2021.

This is because China is likely to be the only major economy to overcome the impact of the pandemic and achieve positive growth in 2020. This along with the drastically increased monetary supply from the US Federal Reserve caused the RMB to rise by nearly 10 percent against the dollar in 2020.

The RMB's appreciation has a certain market basis, but China still needs to take measures to ensure it does not attract excessive speculative capital. This will not only affect China's manufacturing exports, but may also undermine the stability and security of its financial market due to the huge amounts of capital inflows and outflows.

As other countries' production dipped or was suspended under the impact of the epidemic, China's exports grew beyond expectations in 2020, and such trade surplus and corresponding expectations have added upward pressures on the RMB.

However, the RMB's substantial appreciation in 2020 occurred only against the US dollar. Considering that foreign trade is mostly conducted in the US dollar, and that it takes a certain period to regain the funds in the trade sector, the RMB's continuous appreciation against the US dollar will cause great exchange losses to China's domestic producers and traders, and the impact will be even greater if the rising commodity prices continue to raise costs. Therefore, China should avoid falling into the trap of seeing an export boom but suffering sustained losses. And instead it should stabilize the RMB's exchange rate.

China's central bank has been making great efforts to curb the RMB's fast appreciation. Reducing the weight of the US dollar in the exchange rate index currency basket can prevent the RMB's exchange rate from being overvalued by the US dollar's depreciation cycle.

Maintaining the basic stability of the RMB's exchange rate is a complex and systematic project. The authorities must strengthen prudent management. Regulators should help enterprises improve risk management, guide the market to gradually adapt to the fluctuations brought about by exchange rate liberalization and actively participate in the process of the Chinese currency's internationalization.