Trade surplus, opening-up, fiscal and monetary measures seen as supports

 

While the renminbi exchange rate against the US dollar touched a 23-month low on Monday, it is unlikely the Chinese yuan will depreciate significantly in the rest of the year, thanks to the country's economic resilience, said experts.

 

Spot USD/CNY fell 296 basis points to close at 6.8384 on Monday, the lowest level since Sept 10, 2020.

 

This was mainly due to the rally of the US dollar on Monday, with the dollar index hitting the 109 level again, said Ipek Ozkardeskaya, senior analyst of Swissquote Bank.

 

But, compared to other currencies, the renminbi has remained resilient against the greenback's rally. The EUR/USD sank below parity on Monday.

 

Although the USD/CNY rate has exceeded the highly watched 6.8 level, this round of the renminbi's depreciation will be much milder than that in the second quarter, thanks to China's ongoing economic recovery amid proactive fiscal measures and moderately relaxed monetary policies, said analysts from HSBC.

 

Still, experts suggested special attention be paid to the Jackson Hole meeting, which will start on Friday in the US.

 

On the one hand, the meeting may have a bigger-than-usual impact on investor sentiment, as the market does not really know where the US Federal Reserve is headed, said Ozkardeskaya.

 

On the other hand, the US dollar may continue to rally if the Fed releases more hawkish messages over the meeting, said experts from Industrial Securities.

 

The good news, they said, is that China's central regulators are prepared. The moderate 5-basis-point cut in one-year loan prime rate, a major benchmark interest rate, that the People's Bank of China announced on Monday is one way that the central bank manages the market expectations of renminbi depreciation, said experts from China Merchants Securities.

 

According to the National Bureau of Statistics, trade surplus spiked 90.9 percent year-on-year to 682.7 billion yuan ($99.7 billion) in July. The trade surplus in goods in the first half of 2022 reached a historic high of $320.7 billion.

 

The surplus will help stabilize the renminbi exchange rate and avoid capital outflows, said Zhang Zhiwei, chief economist of PinPoint Asset Management Ltd.

 

Meanwhile, market participants and capital in China's foreign exchange market have been largely enriched with the implementation of the opening-up policy in the bond market.

 

China's foreign exchange market is thus more capable of confronting and grappling with all kinds of impacts, said Wang Chunying, deputy head and spokeswoman of the State Administration of Foreign Exchange.

 

According to data released by the China Foreign Exchange Trade System on Aug 15, overseas investors bought 6.6 billion yuan of onshore renminbi bonds, ending the four-month capital outflows this year.

 

As China's economy is back on track for stable growth, overseas institutions have quickly regained confidence in Chinese bonds, said Xie Yaxuan, chief macroeconomic analyst from China Merchants Securities.

 

Given the higher risk of global economic recession and bigger financial market volatility, yuan-denominated bonds will be more favored by overseas capital in order to hedge risks.

 

Lian Ping, chief economist at Zhixin Investment, said that two-way fluctuation will set the tone for the renminbi exchange rate in the second half of 2022, with the reading expected to oscillate between 6.4 and 7.

 

Given China's economic growth rate, international income and expenditure, its balance of international payments, the US dollar index and China's exchange rate adjustment policies, there is little room for the renminbi to depreciate significantly in the following months, he said.