The Renminbi Exchange Rate Trend is Highly Watched, Strong Signal of Stability from Central Rate
The Renminbi exchange rate has recently regained attention in the market. On December 12, the official midpoint rate of Renminbi was reported at 7.1854, with a countercyclical factor of -817 points, indicating a significant signal of stability. Although the Renminbi briefly rose to 7.24 after the political bureau meeting, the US dollar against offshore Renminbi nearly reached 7.3 on December 13. By the end of the week, the USD/offshore Renminbi was at 7.277, and USD/onshore Renminbi was at 7.2756.
Federal Reserve and Trump's Policies Intensify Pressure on Renminbi
Analysts noted that with the new US administration taking office, Trump might intensify tariffs on multiple countries, coupled with a decreased expectation of Federal Reserve rate cuts, the persistently strong US dollar puts pressure on Asian currencies, including the Renminbi. Morgan Stanley forecasts that the US will impose tariffs on China in phases, with effective tariffs possibly rising to 26% by the end of 2025, further weighing on the Renminbi exchange rate.
Meanwhile, the expectation for China's reduction in reserve and interest rate reduction heats up, rapidly widening the Sino-US interest rate differential. The yield on the US 10-year Treasury exceeded 4.4%, while the concurrent Chinese yield was only 1.77%, with a spread of 270 basis points. Goldman Sachs analysts believe the Renminbi is currently overvalued against a basket of currencies, and the devaluation pressure is unlikely to ease in the short term.
Stabilization Measures Appear, Short-term Policies Remain Relatively Loose
Despite external pressures, the Renminbi midpoint maintained below 7.2 releases a strong signal of stability. The market also noticed that agent banks recently intended to limit devaluation by increasing the cost of holding offshore Renminbi short positions. Additionally, the Central Economic Work Conference clearly proposed moderately loose monetary policies, including reserve and interest rate reductions and increasing the issuance of special and local government bonds to stabilize liquidity and boost market confidence.
Strategists at BNP Paribas indicate that current policy signals suggest short-term rates could drop to around 1%, with long-term 10-year government bond yields possibly falling to 1.5%. Nomura predicts that China will implement a 50BP comprehensive reserve cut before the end of 2024 and two further 50BP cuts in 2025 to release liquidity.
Future Outlook: Policies and International Situation Will Decide the Trend
Wall Street's forecast for the Renminbi indicates that by the end of 2024, the US dollar against the Renminbi might stabilize around 7.3, and in 2025, it could further rise to the 7.4-7.6 range. Goldman Sachs points out that each time the USD/offshore Renminbi hits a new high, it typically surpasses the previous high by about 2000 points, a pattern that may recur in 2025.
In the short term, the expansion of the Sino-US interest spread, potential tariff threats, and the Federal Reserve's policy direction are the primary sources of depreciation pressure on the Renminbi. However, with the domestic policy adjustment efforts intensifying, the Renminbi is expected to remain stable in the medium term, and its specific trend will still depend on changes in the external environment and the effectiveness of policy implementation.
