China | RMB exchange rate sharp depreciation amid diverging monetary policy

Summary

We analyze the underlying macro reasons behind the recent RMB exchange rate sharp depreciation and explain our forecast of RMB till year end.

Key points

• Key points:
• Recently, the RMB to USD exchange rate has devastatingly depreciated by 3.7% from 6.367 to 6.6, posing financial market turmoil together with stock market sell-off and largely attracting the global market’s attention.
• Macroeconomic fundamentals significantly drove this round of RMB depreciation, including the diverging monetary policy between China and the US, the recent Omicron flare-ups and Shanghai lockdown, the shrinking China’s current account and accelerating capital outflows, etc.
• Looking forward, depreciation is unavoidable amid the contrasting monetary policy measures between China and the US and we predict RMB exchange rate will reach 6.6 with some upside bias at end-2022.
• In the medium-to-long term, the PBoC is willing the RMB exchange rate to display some two-way fluctuation around its equilibrium level, and they will certainly intervene in the FX market if the RMB exchange rate displays some one-way trending.

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