In an exclusive interview, Guan Tao, Global Chief Economist at BOC Securities, stated that in the second half of the year, domestic economic policies will focus on consolidating foundations and nurturing vitality, emphasizing recuperation and structural adjustment, seeking progress in stability, and not having overly high expectations for economic stimulus and rebound.
China's exports are not sensitive to exchange rates but are sensitive to external demand. The prosperity of the international market and strong external demand are important factors driving the growth of China's exports. For example, one of the important reasons why China's exports have recovered well this year is the stabilization of the international economy and the restocking of inventories by European and American companies. Although China may not export directly to Europe and America, it can indirectly provide capital goods and intermediate goods through other places.
Furthermore, he pointed out that it is also important to note that although the appreciation of the renminbi may not directly affect the volume of exports, it has a significant impact on the financial condition of export companies.
Text:
Guan Tao, Global Chief Economist at BOC Securities, made a forecast on the trend of the renminbi exchange rate for 2024 at the end of last year. He expected that against the backdrop of the continuous recovery of the Chinese economy, if the US economy shows three different scenarios, the renminbi exchange rate will show three possible trends:
Advertisement
1. Neutral scenario: The US economy has a soft landing, the Federal Reserve slightly cuts interest rates, the dollar fluctuates in both directions, and the renminbi maintains a fluctuating trend against the dollar with both gains and losses.
2. Optimistic scenario: The US economy has a hard landing, the Federal Reserve significantly cuts interest rates, the dollar trends weaker, and the renminbi against the dollar will show a trend reversal.
3. Pessimistic scenario: The US economy does not land, the Federal Reserve cuts interest rates less or not at all, the dollar trend is strong, and the renminbi exchange rate continues to bear pressure.
He stated that in the first half of this year, the domestic economy achieved a good start, the economic fundamentals marginally warmed up, and had a certain supporting effect on the renminbi. However, due to the increased probability of the US economy not landing, especially the unexpected rebound of US inflation at the beginning of the year, the market generally expected the Federal Reserve to delay interest rate cuts, and the external environment was generally bearish for the renminbi exchange rate. In the second half of the year, domestic economic policies will focus on consolidating foundations and nurturing vitality, emphasizing recuperation and structural adjustment, seeking progress in stability, and not having overly high expectations for economic stimulus and rebound.
He further analyzed that entering the second quarter, US inflation fell, the job market cooled down, poor July employment data triggered the recession threshold of the Sam Rule, and market concerns about a US economic recession intensified. At present, it seems certain that the Federal Reserve will cut interest rates in September, but the market still has different guesses about the magnitude of the rate cut and the number of rate cuts within the year. If the Sam Rule continues to be effective and the US economy has a hard landing, the Federal Reserve may significantly cut interest rates, the dollar weakens, and the current rebound of the renminbi exchange rate may be a turning point for adjustment. However, there are also views questioning the possible failure of the Sam Rule. If the rise in US unemployment is due to an increase in labor supply, then the US economy may be in a soft landing state, and the rebound of the renminbi exchange rate may indicate a new round of two-way fluctuations.Furthermore, he believes that the market is also concerned about the possibility of a U.S. economic hard landing. The U.S. economy grew at an annualized rate of 1.4% in the first quarter and 2.8% in the second quarter, with both quarters still around 3% year-over-year, higher than the potential economic growth rate of the United States. This implies that U.S. inflation still has stickiness, and geopolitical tensions and trade conflicts may exacerbate inflation, limiting the Federal Reserve's room for rate cuts and putting pressure on the renminbi exchange rate. In the second half of the year, we still face many uncertainties. Against the backdrop of a stable and progressive domestic economy, the market generally expects the Federal Reserve to cut rates in September, and other major central banks are also cutting rates. The global trend of rate cuts and monetary easing may have a marginal benefit for the renminbi exchange rate.
A detailed analysis of the major factors that will affect the renminbi exchange rate in the future:
(1) The domestic economic recovery situation: It is essential to steadfastly achieve the economic and social development targets set at the beginning of the year. To achieve this goal, we have accelerated the implementation of some key policies and are actively preparing additional policies to support the continuous recovery and improvement of the economy.
(2) Changes in the external environment: Especially the direction of the Federal Reserve's monetary policy has a significant impact on the renminbi exchange rate. Guan Tao believes that the Federal Reserve's rate cut has become a high-probability event, and most other major central banks are also in a rate-cutting cycle. The global currency is moving towards easing again, which is marginally beneficial for the renminbi exchange rate.
(3) Geopolitical factors: The outcome of the U.S. election and the future direction of China-U.S. relations, as well as geopolitical events such as tensions in the Middle East and trade frictions, will affect market sentiment and cross-border capital flows, thereby affecting the trend of the renminbi exchange rate.
When discussing the possibility of the central bank cutting rates, Guan Tao stated that China's monetary policy will continue to focus on its own needs and adjust according to the actual needs of China's economic growth. He mentioned that in mid-to-late July, the central bank lowered several interest rates in three consecutive announcements, sending a strong signal of increasing counter-cyclical adjustments and supporting economic recovery. Whether the central bank will continue to cut rates in the future depends on the domestic economic situation and changes in the external environment.
Regarding the impact of renminbi appreciation on carry trade, Guan Tao pointed out that the renminbi is currently one of the low-interest currencies, and there is a phenomenon of interest rate arbitrage. Once the renminbi shows an appreciation trend, it may lead to the reverse closing of interest rate arbitrage, causing exchange rate fluctuations. On foreign exchange controls, Guan Tao said that the more flexible the exchange rate, the less dependence on foreign exchange controls. When necessary, the central bank will take macro-prudential measures or capital controls to stabilize the market.
In addition, Guan Tao emphasized that China's exports are not sensitive to the exchange rate but are sensitive to external demand. The prosperity of the international market and strong external demand are important factors driving the growth of China's exports. For example, one of the important reasons why China's exports have recovered well this year is the stabilization of the international economy and the restocking of European and American enterprises. Although China may not necessarily export directly to Europe and America, it can indirectly provide capital goods and intermediate products through other places.
Furthermore, he said it is also important to note that although the appreciation of the renminbi itself may not directly affect the volume of exports, it has a significant impact on the financial condition of export companies. Currently, more than 90% of cross-border transactions are settled in U.S. dollars, not in other currencies. This means that for most companies, fluctuations in the renminbi exchange rate against the U.S. dollar will directly affect their income and profits.
For example, if a company's profit margin is only 3-4%, and the renminbi appreciates unilaterally by 4-5% against the U.S. dollar in the short term, if appropriate exchange rate hedging measures are not taken, the company's export business may actually face the risk of loss, working in vain.Finally, discussing the current U.S. high-tech market, especially the hot topics of technological advancements in AI, ChatGPT, and other production technologies, he stated that the narrative being told in the market today is quite similar to that of the dot-com bubble in the 1990s, both revolving around the narrative of technological innovation driving economic growth. However, he raised doubts, arguing that the current model of technological innovation is different from the past, where low-cost technologies replaced high-cost ones with clear profit models; now it is high-cost investment without a clear profit model, which goes against traditional common sense. Therefore, part of the reason for the recent significant fluctuations in the global stock market is the market panic triggered by U.S. high-tech stock financial reports not meeting expectations.
Regarding the future trend of high-tech stocks, Guan Tao believes that a pullback is a high-probability event, as stock prices cannot rise indefinitely. He pointed out that when the market cannot explain the rise in stock prices with existing theories, it is often a signal of the accumulation of bubbles. The Federal Reserve also warned multiple times in its semi-annual financial stability report about the risks of overvalued asset prices, and pointed out that market participants are currently more concerned that the Federal Reserve's monetary policy may lag behind market changes, potentially reacting too late to an economic slowdown.