RMB bullish expectations are heating up in line with inflation expectations

On April 27, the central parity of the RMB against the US dollar was US$1 to RMB6.596, an increase of 77 basis points from the previous trading day of 6.5173, and it hit a new high since the exchange rate reform, approaching 6.5 again. From the appearance, the continued weakness of the US dollar in the near term has supported the rise of the RMB against the US dollar. On April 21st, the US dollar index, which measures the dollar's movement against a basket of currencies, fell below 74, setting a new low since August 2008. At the same time, the overseas market dollar against the RMB 6-month N DF (no principal delivery forward) also hit a record low. As of the 27th, the RMB has appreciated by nearly 1.6% against the US dollar this year. At the same time, the market is expecting more and more daring for the appreciation of the RMB this year. At the end of last year, most research institutions and industry scholars expected the appreciation of the renminbi to be around 3%. Recently, most people in the industry have raised their expectations ceiling, 5% is an average, and some people predict that the renminbi will appreciate. Reached 7%. However, the dollar factor only constitutes one of the reasons for the strength of the renminbi against the US dollar. If the Fed is expected to withdraw from Q E2 as scheduled by the market, the US dollar will gain some support and even go out of reverse. Will there be so many people who continue to strengthen the renminbi? Here we have to talk about another important factor that has recently supported the expectation of RMB appreciation – inflation expectations. According to international financial theory, monetary authorities are more concerned with real interest rates. To achieve real exchange rate rise, either use inflation or use a nominal exchange rate in a low inflation environment. Decomposing the recent speeches of senior financial and economic officials, market participants seem to have interpreted such a signal—with the government's tolerance for inflation falling, the government's tolerance for appreciation is increasing. Hu Xiaolian, deputy governor of the People's Bank of China, recently published a signed article on the central bank's website, saying that “with the further consolidation of the economic recovery in the second half of 2010, the rapid rise in prices has gradually become the most prominent contradiction in economic operations” and clearly stated that “the RMB is improved. The exchange rate formation mechanism enhances exchange rate flexibility and slows the pressure of imported inflation." In fact, increasing exchange rate flexibility is one of the important measures to tighten the monetary conditions of rising prices. Ding Zhijie, dean of the School of Finance of the University of International Business and Economics, said that the BIS data showed that the nominal effective exchange rate of the RMB fell from 117.42 in June last year to 112.42 in March this year, and the real effective exchange rate changed from 119.03 to 117.69. That is to say, during that time, the government achieved a general stability of the real effective exchange rate by using a combination of nominal exchange rate depreciation and inflation. "The government that has always regarded inflation as a tiger, the determination and intensity of inflation control is not too big, but due to excessive caution on the exchange rate issue, the effect of governance has been greatly reduced, and even on the contrary, it has been transmitted from various channels recently. The signal shows that the government has realized this and has begun to work hard to adjust the policy mix, and inflation is expected to cool down." Ding Zhijie said. In fact, the effect of the appreciation of the local currency on the suppression of imported inflation is also supported by research results. ANZ's research conducted in 2010 showed that a 10% appreciation of the renminbi against the US dollar would result in a 3.2% decline in the PPI index in the medium term and a non-food CPI index of 0.64% in the medium term. However, everything must be viewed in two ways. Like the relationship between any two economic variables, the logical relationship between exchange rate and inflation rate is more complicated than we think. As Qu Hongbin, chief economist of HSBC Greater China, said, as an important economy, China's demand for bulk products accounts for 70% of the world's overall demand, and changes in China's demand will trigger fluctuations in the entire market. The appreciation of the renminbi will boost China's demand for commodities, and the increase in demand will boost the price of bulk commodities, and input inflation may be more serious. The author believes that for China, the advantages and disadvantages of the appreciation of the renminbi are not so easy to calculate. Between the trade-offs, the grasp of the policy rhythm is particularly important.  

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