The RMB exchange rate has depreciated by nearly 10%. Experts say there will be no accelerated depreciation mechanism.

On August 11, 2015, the People's Bank of China implemented the reform of the RMB exchange rate mid-price quotation mechanism, causing the RMB exchange rate to fluctuate greatly. The accumulated depreciation rate exceeded 5% for three consecutive days, the largest decline in 20 years. As of the end of August 2016, the RMB exchange rate has depreciated by nearly 10%.
At present, the expectation of RMB depreciation still exists, and there is a gradual warming trend. Under the influence of multiple factors such as the rapid decline of foreign exchange reserves, the Fed’s rate hike cycle and the acceleration of financial liberalization, the market has even begun to worry about whether China will have a currency crisis.
The consequences of the currency crisis are very serious. International experience shows that the currency crisis is a key link in the outbreak of a comprehensive financial crisis in emerging economies. Once a currency crisis occurs, it will often worsen domestic financial risks and lead to the outbreak of a comprehensive financial crisis. The most serious and well-known financial crisis in the history of emerging economies such as the 1994-1995 Mexican financial crisis, the 1997-1998 Southeast Asian financial crisis, and the 2001-2002 Argentine financial crisis was accompanied by a currency crisis.
Historically, in the wake of the currency crisis in emerging economies, economic indicators that are closely related to exchange rates often deteriorate overall. For example, the economic growth rate as a fundamental factor in determining the exchange rate level will fall sharply. The current account balance will be converted from a surplus to a deficit as the main factor determining the supply and demand of the foreign exchange market. The external debt balance will rise sharply as an important factor in inducing currency depreciation expectations. As an important strategic asset to prevent currency crisis, foreign exchange reserves will be rapidly reduced, and capital control will be relaxed as an important means of defending the local currency from attack. At present, China's economic growth has gradually slowed down, the current account has experienced a recession surplus, and foreign exchange reserves have also fallen sharply from the previous period. These factors have increased China's exchange rate risk to a certain extent. However, the author believes that China will not have a currency crisis at present, mainly for the following five reasons.
First, China’s economic growth is still high from a global perspective. In 2015, China’s economic growth rate reached 6.9%, much higher than the global (3.1%), advanced economies (1.9%) and emerging markets and developing economies (4%), and much higher than the United States. The economic growth rate of major international reserve currency issuers such as (2.4%), Eurozone (1.7%), Japan (0.5%) and the UK (2.2%). Compared with the economic growth on the eve of the currency crisis in emerging economies, it is more obvious that China is unlikely to have a currency crisis. On the eve of the currency crisis in emerging economies, economic growth usually has a cliff-like decline, and even negative growth, which is an important factor that causes the market to lose confidence in the country's economy and currency and cause a sharp fall in the exchange rate. For example, before the Mexican currency crisis broke out in 1995, Mexico’s economic growth plummeted by 10 percentage points in one year and fell into negative growth (down from 4.7% to -5.8%); before the Thai currency crisis broke out in 1997, Thailand’s economic growth rate From 8% (1994) to -2.8% (1997), there was also a negative growth; before the Chilean currency crisis broke out in 1999, the economic growth rate also fell by 7 percentage points within two years (by 6.6%) To -0.7%); Argentina had negative growth for four consecutive years before the currency crisis in 2002, and the economic growth rate fell to -10.9% when the currency crisis broke out. In contrast, although China's economic growth rate has also declined to a certain extent since entering the new normal, it is still in the mid-high-speed growth and the growth trend is stable.
Second, China's current account still maintains a large surplus. From international experience, the large deficit of the current account is a direct cause of the currency crisis in emerging economies. The current account of Mexico, Thailand, Chile and Argentina before the outbreak of the currency crisis is in a state of deficit. However, China's current account surplus in 2015 was as high as US$330.6 billion, up 20% from US$277.4 billion in 2014. According to the forecast of the central bank's working paper, China's GDP growth rate and current account surplus will still reach 6.8% and 2.8% respectively in 2016, which means that if the exchange rate is 6.6 yuan to 1 US dollar (January to August 2016) In 2016, the current account surplus will remain above $3,100. Therefore, from the perspective of the current account balance, the foreign exchange market still has a large demand for the renminbi, and the possibility of a currency crisis is unlikely.
China's current account surplus is mainly due to the trade surplus of goods. It is pointed out that China's trade surplus in goods is a declining surplus (referring to the surplus formed by the decline in import and export speed as the import declines faster than the decline in exports). This is that China's trade surplus and current account surplus are unsustainable and will affect the stability of the RMB exchange rate. In fact, the current concern about the depreciation of the renminbi and the currency crisis is mainly the depreciation of the renminbi relative to the US dollar. However, the trade surplus between China and the United States, which has the most direct impact on the exchange rate of the renminbi against the US dollar, is still gradually expanding, and China’s exports to the United States are still growing at a positive rate, not a recessionary surplus. In 2015, China’s trade surplus with the United States reached 1.62 trillion yuan, up 11% from 1.46 trillion yuan in 2014. In 2015, exports to the United States increased by 4.5% compared with 2014. Therefore, the recession deficit itself is not enough to pose a greater threat to the RMB exchange rate.
Third, China’s foreign debt balance is small, and the mechanism of exchange rate depreciation and debt deteriorating causes the exchange rate to depreciate rapidly. The high external debt is the catalyst for the depreciation of the exchange rate to the currency crisis. This is because, in the case of high external debt, the sharp depreciation of the exchange rate will lead to a further increase in the level of external debt, and the further rise of the already high external debt will exacerbate the pessimistic expectations of the country's future solvency, financial position and even economic fundamentals. , which in turn triggers the exchange rate to depreciate. However, China’s external debt is relatively small. The ratio of external debt to GNP in 2015 was only 9.3%, which was far lower than 26.9% and 74.6% of Mexico’s 1995 and Thailand’s 1997 crisis.
Fourth, China still has relatively sufficient foreign exchange reserves to guarantee the stability of the RMB exchange rate. Some people believe that China's current foreign exchange reserves may not be sufficient. The main criterion is that the ratio of M2 to foreign exchange reserves may be higher than the standard of 5~10. As of the end of July 2016, China's M2 balance was 149 trillion yuan. If the RMB is calculated against the US dollar at the end of July, it is sufficient to hold 2.14 to 4.48 trillion US dollars of foreign exchange reserves. China's foreign exchange reserves have fallen back from the previous high of 3.8 trillion US dollars to 3.2 trillion US dollars in more than one year. According to this trend, it is likely to fall below the lower limit of sufficient demand in the future. However, the ratio of M2 to foreign exchange reserves is not suitable as an early warning indicator of the currency crisis. When the currency crisis of emerging market countries occurs, the indicator usually meets the requirements. When Argentina’s currency crisis occurred in 2002, the ratio of M2 to foreign exchange reserves was only 2.6, far below the 5-10 standard, and the lowest since 1991. The ratio of M2 to foreign exchange reserves in Chile’s currency crisis in 1999 was only It is 2.6.
In contrast, the ratio of foreign exchange reserves to monthly imports and the ratio of foreign exchange reserves to external debts are more suitable for judging whether foreign exchange reserves are sufficient from the perspective of currency crisis. When Mexico experienced a currency crisis in 1995, foreign exchange reserves were insufficient to pay for one month's imports. In the event of a currency crisis in Thailand, Chile and Argentina, foreign exchange reserves were only enough to sustain imports for four to six months. In terms of debt repayment, the ratio of foreign exchange reserves to foreign debt in Mexico was only 47% in 1995, and in Thailand it was as low as 24.5% in 1997. Foreign exchange reserves were insufficient to repay foreign debt. The current level of foreign exchange reserves in China is much higher than the level of foreign exchange reserves in the emerging currency currency crisis. As of the end of 2015, the ratio of China's foreign exchange reserves to imports reached 18.8 months, which means that China's foreign exchange reserves are sufficient to cover China's import volume for nearly one and a half years; the ratio of China's foreign exchange reserves to foreign debt levels reached 406% at the end of 2014, enough Used to repay foreign debt.
Fifth, China's capital controls are still strong. From the Chinn-I-to index (the higher the degree of openness), which reflects the openness of the capital account, the China Chinn-Ito index in 2014 was only 0.16, which is not only far lower than the current level of most developed countries, but also obvious. It was lower than the capital account opening degree before Mexico, the 1997 Thailand and the 2002 Argentine currency crisis (0.69, 0.41 and 0.76, respectively). At the same time, China's control over short-term cross-border capital flows that pose the greatest threat to exchange rate stability is still relatively strict. As the main means by which the SAFE controls short-term cross-border capital flows, the limits of qualified foreign institutional investors (QFI-I), qualified domestic institutional investors (QDII) and RMB qualified foreign institutional investors (RQFII) remain low. As of the end of August 2016, the State Administration of Foreign Exchange approved a total of 81.5 billion US dollars of QFII quota, 90 billion US dollars of QDII quota and 510.3 billion yuan of RQFII quota, accounting for only 1.15%, 1.3% and 1.1% of the total market value of A shares, respectively.
Although China does not have a currency crisis, it should still pay attention to maintaining exchange rate stability and coordinate the relationship between exchange rate stability and financial liberalization.
After the “8·11 exchange reform”, China may further promote financial liberalization (especially capital project liberalization) to accelerate the internationalization of the RMB. In the context of the gradual slowdown of China's economy, financial liberalization will further tighten the impossibility of triangular constraints, affecting exchange rate stability. The impossible triangle theory shows that the three goals of monetary policy independence, exchange rate stability and free capital flow cannot be achieved at the same time. At most, only two goals can be achieved simultaneously. The Chinese central bank has long chosen the "intermediate solution" of the impossible triangle, that is, a partially flexible exchange rate, part of the capital account opening and part of the monetary policy independence. The opening of the capital account brought about by the internationalization of the RMB will undoubtedly threaten the independence of monetary policy and the stability of the exchange rate. Moreover, even if the central bank sacrifices monetary policy independence in an attempt to exchange exchange rate stability, it is difficult to succeed. The reason is that in the context of overcapacity, increased bank non-performing loans and high debt, if the lack of monetary policy is escorted, economic downside risks and debt risks are likely to be difficult to control, resulting in greater depreciation pressure on the renminbi. Therefore, the current opening of capital accounts and financial liberalization should be carefully promoted to maintain exchange rate stability.
(The author is a lecturer at the School of Finance, Central University of Finance and Economics, Guo Yumei)

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