Recently, the exchange rate has reached a new high.
Why is the RMB rising?
1)Epidemic
The new crown epidemic has spread globally, many countries have suffered huge blows, and the global financial turmoil has declined. Because of the lack of strict defense control measures, a second epidemic has occurred. Under strict epidemic prevention measures, China has basically controlled the epidemic and the economy has begun to recover. This gives China a first-mover advantage in the economic fundamentals of the post-epidemic era. This is a strong expectation for capital.
2) United States
With the outbreak of the US epidemic, the economy has been severely hit. The Fed has made it clear that it abandons the US dollar and protects US stocks, and immediately begins to adopt a zero interest rate and unlimited quantitative easing policy, which has caused the flood of US dollar liquidity, and the market expects that the easing period will last for a considerable period of time. Superimposed on the second outbreak, this weakened the dollar even more.
3) RMB policy
For the RMB policy, we have implemented a floating exchange rate mechanism that is regulated and managed by the top management.
4) National debt
As many countries around the world have entered the era of zero interest rates, China’s monetary policy has begun to tighten, which has caused a spread of national debt. The 10-year Treasury bond yield has always represented the tightness of the currency water pipes. Beginning in May, the central bank began to tighten water pipes, money became more expensive, yields on Treasury bonds began to rise sharply, and the spread between China and the United States on bonds quickly widened, and short-term capital inflows pushed the yuan to appreciate against the US dollar. The most obvious is to see if your Yu’E Bao income has changed.
5) RCEP
A few days ago, the signing of the Regional Comprehensive Economic Partnership Agreement (RCEP) also added fuel and fire to the appreciation of the renminbi.
What impact will the sharp appreciation of the RMB have on textile enterprises?
Exchange rate fluctuations are a long-term market risk faced by foreign trade companies, but the recent rapid appreciation of the RMB has caught some companies off guard. In contrast, the appreciation of the renminbi to around 6.5 poses a very big challenge for small and medium-sized textile companies that rely on price to win. These labor-intensive products will not be able to compete in price with some Southeast Asian countries because of the appreciation of the renminbi exchange rate.
Ye Jinfeng, the person in charge of a company that mainly produces tablecloths and shower curtains, told reporters that fluctuations in the RMB exchange rate have a great impact on the company. “It is mainly reflected in the increase in prices, fewer orders, and fewer profits.” He added that small and medium-sized enterprises do not have any hedging plan and can only absorb the exchange rate difference by themselves.
The reduction in orders and the loss of foreign exchange settlement are common challenges faced by these foreign trade companies. When some companies received foreign payment for foreign exchange settlement, the actual renminbi in hand shrank greatly due to the increase in the exchange rate, which directly affected corporate efficiency and even led to corporate losses. Ms. Liang told reporters, “In order to avoid this risk, we have to lock the exchange rate, that is, in the case of frequent exchange rate fluctuations, let the bank handle the exchange rate lock operation for the enterprise.”
The reporter also noticed that some price-sensitive companies are usually affected by the appreciation of the RMB exchange rate. The staff of a yarn foreign trade company admits that their prices are usually suppressed to a very low level by customers due to competition requirements. When a company encounters a loss in the RMB exchange rate, coupled with the pressure of rising raw materials and rising ocean freight, the pressure on the company’s operation will increase significantly.
Tan Yaling, president and chief economist of the China Institute of Foreign Exchange Investment, told reporters that half of China’s exports are supported by private enterprises. Compared with state-owned and foreign-funded enterprises, their ability to withstand market risks is relatively weak. The rapid appreciation of the RMB exchange rate has indeed brought great challenges to these private enterprises. “A company earns 1 million U.S. dollars. When the RMB exchange rate is 7, it can exchange 7 million RMB back, but now it can only exchange back 6.5 million. You must know that the profit margins of these companies are very low. The cost line of these companies even poses a survival challenge for these companies.”
However, it has a relatively large adverse impact on export companies. Due to the impact of the epidemic, the slowdown in external demand and the appreciation of the renminbi will increase the cost of export products, which will affect the competitiveness of export companies’ products in the international market. There will also be exchange rate risks. May cause exchange losses. Therefore, export companies must take measures to prevent and avoid exchange rate risks.
According to expert analysis, the strengthening of the renminbi exchange rate may continue, but considering the subsequent risks that may exist, including global risk aversion, Sino-US relations and asymmetric capital controls, the renminbi exchange rate may show a slower slope of appreciation. The short-term RMB exchange rate range may be 6.7-6.8. The continued appreciation of the exchange rate may have a certain impact on China’s exports and manufacturing.
“We must increase policy support for export-oriented enterprises, and increase fiscal, financial, and export tax rebate support.” Wen Bin suggested.
Will the RMB continue to rise in the future?
The information on how the renminbi will go in the future is critical, and market analysts have different judgments.
For example, Cheng Shi, chief economist of ICBC International, believes that the force that promotes the stability of the renminbi will continue in 2021.
However, Li Chao, chief economist of Zheshang Securities, believes that from the perspective of foreign exchange market forward and option-related indicators that can reflect exchange rate expectations, exchange rate expectations remain generally stable, and there is no obvious unilateral expectation. Therefore, the probability of a substantial appreciation of the RMB exchange rate overshoot is unlikely.
Although the future trend of the renminbi is difficult to predict, it is certain that there is no currency that only falls but does not rise or only rises but does not fall. If it falls too much, it will rise, and if it rises too much, it will fall.
A spokesperson for the Foreign Exchange Administration also said that a smart market can always see the positive and negative sides of the coin. It not only fully recognizes that the domestic economy is basically supported by the RMB exchange rate, but also pays close attention to various external instability and uncertainties. Keep the renminbi up and down, with two-way fluctuations.