The RMB index is pegged to a basket of currency exchange rate reforms to stir the global currency market

Summary Introduction: "This new move actually indicates that the renminbi is undergoing a major change, that is, the gradual detachment from the US dollar exchange rate." David Woo, global foreign exchange director of Bank of America Merrill Lynch, was interviewed by the 21st Century Economic Report...
The new move actually shows that the renminbi is undergoing a major change, that is, the gradual detachment from the US dollar exchange rate. David Woo, global head of foreign exchange at Bank of America Merrill Lynch, told the newspaper in an exclusive interview with the 21st Century Business Herald.

Special correspondent Zhang Han reports from New York

On the eve of the Fed’s rate hike, China introduced a new exchange rate measure, the yuan or “decoupling” the US dollar, and turned to the main reference and maintained stability with a basket of currencies.

On the evening of December 11, the China Foreign Exchange Trading Center released the CFETS RMB exchange rate index for the first time. The index includes 13 foreign exchange currency currencies listed in the China Foreign Exchange Trading System. The sample currency weights are calculated using the trade weight method that takes into account the entrepot trade factors.

"The new RMB exchange rate index will help guide the market to change the past habit of mainly focusing on the bilateral exchange rate of the RMB against the US dollar, and gradually use the effective exchange rate calculated with reference to a basket of currencies as the main reference system for the RMB exchange rate level." The review article stated.

Since the exchange rate reform in 2005, China's exchange rate system has always claimed to refer to a basket of currencies, but in the past few years, the renminbi has in fact maintained a relative synchronization with the US dollar.

"This new move actually shows that the renminbi is undergoing a major change, that is, the gradual detachment from the US dollar exchange rate." David Woo, global head of foreign exchange at Bank of America Merrill Lynch, told the newspaper in an exclusive interview with the 21st Century Business Herald.

The industry believes that this move will change the long-term view of the market to observe the RMB exchange rate "close to the dollar", become an important indicator of the market's tendency to observe exchange rate policy, and the marketization process of the RMB exchange rate will also be greatly advanced.

With the US Federal Reserve's interest rate hike and the sharp appreciation of the US dollar, the central bank has made a lot of efforts in the open market in the past few months in order to maintain the relative stability of the renminbi. In the past six weeks, the renminbi has continued to fall, according to Thomson Reuters data dating back to December 2005, which is the longest continuous weekly decline.

"The announcement of reform measures has alleviated the suspicion and pressure on the devaluation of the renminbi, and the Fed’s rate hike is the 'best opportunity' to announce this policy," David Woo said.

On December 14, the first trading day of the exchange rate initiative, the People's Bank of China continued to cut the central parity of the yuan. The central parity of the yuan against the US dollar was reported at 6.4495, down 137 basis points, and was lowered for the sixth consecutive day. The offshore RMB continued to fall sharply. As of press time, the offshore RMB fell to 6.5554 against the US dollar.

“Compared with a basket of currencies, the renminbi is still expensive. Depreciation will benefit China’s trade and reduce deflationary pressures.” AIG’s managing director and acting chief economist Henry Mo reports to the 21st Century Business Herald. Said.

Eswar Prasad, an economist at Cornell University, said that managing the value of the renminbi with reference to a basket of currencies, not just the dollar, would allow China to transition to more The market's decision to determine the exchange rate is more gradual.

A basket of weight loss dollars increases trade partner weight
According to the CFETS currency basket announced by the China Foreign Exchange Trading Center, the US dollar, the euro and the Japanese yen have the highest proportions, which are 26.4%, 21.39% and 14.6% respectively. In addition, Hong Kong dollars, British pounds and Australian dollars accounted for 6.5%, 3.8% and 6.2% respectively.

"This is in fact the first time the central bank announced the composition of a basket of currencies, which is an important part of the transparency of the RMB exchange rate formation mechanism," Henry Mo said.

After the “8·11” exchange rate reform, the market makers provided the closing price of the inter-bank foreign exchange market on the previous day before the opening of the daily interbank foreign exchange market, and comprehensively considered the foreign exchange supply and demand and the changes in the international major currency exchange rates to the China Foreign Exchange Trade Center. Middle price quote.

“Because the median price is quoted by the market every day and is mainly quoted in RMB against the US dollar, this amount is more a reference to explain the current exchange rate between the RMB and the US dollar, and does not directly affect the daily exchange rate of RMB and USD.” Henry Mo said to the newspaper.

Despite this, this index still has a significant impact on guiding the RMB exchange rate. By comparing the weights of the mainstream currency baskets in detail, Guojin Securities analyzed that CFETS is more relevant than the BIS RMB effective exchange rate index, with high weight on the US dollar, high currency weight in major developed countries, and Southeast Asian and Russian currencies. The weights are also higher, and currencies such as South America and the Middle East are not included; the SDR basket is mainly developed country currency.

Guojin Securities said in the research report that the CFETS index RMB effective exchange rate constitutes a high degree of national relevance, which can reflect the depreciation of the US and the appreciation of the currency of the resource commodity countries.

Since 2015, the overall trend of the CFETS RMB exchange rate index has been relatively stable, with 102.93 on November 30, an increase of 2.93% from the end of 2014. This shows that although the RMB has depreciated against the US dollar since 2015, from a more comprehensive perspective, the RMB has appreciated slightly against a basket of currencies, and the RMB is still a strong currency in major international currencies.

In order to facilitate the market to observe the changes in the effective exchange rate of the RMB from different angles, the China Foreign Exchange Trading Center also lists the RMB exchange rate index calculated with reference to the BIS currency basket and the SDR currency basket. As of the end of November, the above two indices have appreciated from the end of 2014. 3.50% and 1.56%.

Guojin Securities believes that under the control concept that the RMB does not have a long-term depreciation basis, an effective exchange rate appreciation of 1% corresponds to a depreciation of 5% against the US dollar, a 2% depreciation against the Japanese yen, and a 6% appreciation against the euro.

Depreciation as expected
Many economists interviewed by this newspaper said that the introduction of the policy will not change the depreciation expectation of the RMB against the US dollar itself.

Henry Mo believes that the depreciation of the yuan against the dollar will continue as China's current account surplus will gradually decline and the Fed will start a rate hike cycle next week. He predicted that by the end of 2016, the renminbi will gradually depreciate to within the range of 6.7-7.0.

A hedge fund analyst on Wall Street told this newspaper that there will be several possibilities for the yuan in the future. The most extreme situation is to reduce the effective exchange rate of the renminbi to an average level, which means that the renminbi returns to the level before March 2005 (8.3); the second is to return to the end of 2014, which means that the renminbi depreciates from the level of 6.4452 by 1.94. % to 6.6; two years of return need to be reduced to about 7; three years is also 7.4.

According to the aggregated data on the Bloomberg terminal, as of December 14, the median forecast of 40 integrated institutions is expected to rise to 6.58 against the US dollar at the end of 2016.

Asian currencies lower, boosting exchange rate derivatives market
Market participants are almost certain that the introduction of a basket of currencies this time will further lower the prices of Asian and commodity currencies.

“The renminbi will continue to decline for the time being and will fall another 4%-5% next year, which will put pressure on Asian currencies,” said Seungji Jeon, a foreign exchange analyst at Samsung’s futures in Seoul. “Other Asian currencies may fall less than the renminbi because of They have digested more depreciation factors, like the dollar."

A survey by Reuters showed that as China's economic momentum continued to weaken, the market's bearish sentiment towards the yuan reached its highest level in more than five years, and perceptions of most emerging Asian currencies also deteriorated, as the US is expected to raise interest rates.

The South Korean won ranked first in the emerging Asian currency weekly with a 1.9% decline. According to data from the Korea Exchange, foreign capital continues to sell super-Korean stocks, which sold over 2.1 trillion won ($1.8 billion) in the past eight consecutive trading days.

The Malaysian ringgit fell 1.3% this week as global oil prices continued to fall, adding to concerns about the country's oil and gas revenue decline. The Indonesian rupiah fell 0.8%, as demand for US dollars rose as companies settled at the end of the year. The Singapore dollar has fallen 0.5% since the beginning of this week, following the decline of the yuan. The Thai baht has also fallen by 0.5%.

Liu Dongliang, a senior analyst at China Merchants Bank's interbank financial headquarters, believes that at present, large domestic central enterprises and state-owned enterprises have too low risk appetite in dealing with exchange rate issues, and it is difficult to adapt to future exchange rate risks. Exchange rate marketization will force them to force large enterprises. The risk appetite for exchange rate derivatives rises; while the increase in market volatility and the increase in risk are conducive to innovation in the exchange rate derivatives market, and it is expected that new varieties such as foreign exchange futures may accelerate the launch.

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