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The central bank's intention is not to guide the renminbi's sharp appreciation. In my opinion, the central bank's move to revise the exchange rate middle price mechanism is not intended to guide the renminbi to return to the appreciation space, but to maintain the stability of the renminbi currency and reserve space for the Fed to raise interest rates. Specifically, the reasons for supporting the author's judgment are as follows:
First, the addition of the countercyclical factor to the managed floating-synergy is not a substantial change in the exchange rate mechanism.
Many viewpoints suggest that the central bank's reform of the central parity rate of the exchange rate, in addition to the consideration of the previous day's closing price and a basket of currencies, in addition to the consideration of the previous day's closing price and a basket of currencies, the central bank's strengthening of the exchange rate control. But in fact, the author believes that China's exchange rate policy has always emphasized a managed floating policy. The central bank has never given up taking action to maintain the exchange rate within its reasonable range. The practice of the past two years has just confirmed this.
The author believes that this time it is clear that the counter-cyclical factor and the managed floating-synchronization are not the same as the real change of the exchange rate mechanism, but only in the past two years, the depreciation pressure is relatively large, and the central bank has to take the practice of stabilizing the exchange rate. Indicates its intention to stabilize the exchange rate.
Second, the addition of a countercyclical factor may be a new attempt to clearly demonstrate to the market its determination and intention to maintain exchange rate stability to guide market expectations and thereby reduce the cost of intervention.
After all, as early as the beginning of this year, when foreign exchange reserves fell below $3 trillion and the renminbi faced pressure to fall below 7, there was a view that the central bank would have to choose between the above indicators. At the time, the author proposed that “protecting foreign exchange reserves or maintaining exchange rates†is a false proposition. It seems that the increase in foreign exchange reserves since February has coincided with the appreciation of the renminbi, and it is indeed true. However, in retrospect, such a formulation did increase the unnecessary constraint of monetary policy operation, increased the panic of the market, and increased the cost of maintaining exchange rate stability.
Third, modifying the exchange rate middle price formation mechanism and adding the countercyclical factor is a kind of advance preparation for the central bank to raise interest rates in June, and the renminbi may face depreciation.
In my opinion, like the concerns of several previous policy launches, the central bank’s move is intended to prevent the RMB depreciation and large-scale capital outflows that may occur in the Fed’s interest rate hike. Considering that the currencies of the emerging market countries in the previous period have appreciated more against the US dollar, and the RMB has only appreciated slightly against the US dollar, the background of a large depreciation of a basket of currencies has allowed the RMB to appreciate slightly against the US dollar, which helps to allow for the possible depreciation in the later period. Space, but not the signal that allows the renminbi to return to the appreciation channel.
Fourth, in recent years, several reforms have been close to the Fed's interest rate hike, which also reflects the central bank's early consideration of the Fed's interest rate hike or the strengthening of the US dollar, which has led to the depreciation of the RMB, confirming the judgment of the reserved policy space.
For example, the 811 exchange rate reform in 2015 was at the critical moment when the RMB was included in the SDR basket assessment and the return of funds to the United States before the Fed opened the historic rate hike. At the end of 2015, when the central bank released the CFETS basket of currency index, it was also the Fed’s interest rate hike. At the end of 2016, the central bank’s increase in capital control measures was also related to the Fed’s interest rate hike at the end of the year. In June, the Fed may raise interest rates again. In my opinion, similar to the previous exchange reforms, it is a kind of precaution against the possibility of capital outflows and the depreciation of the RMB in the future.
Fifth, the internationalization of the RMB will continue to advance in due course.
There are many views that the central bank’s move makes the exchange rate middle price formation mechanism more opaque, which is a retrogression of reforms and is not conducive to the internationalization of the RMB. But as mentioned above, the exchange rate mechanism of the People's Bank of China has always emphasized the management float, and this change cannot be seen as a sign of re-tightening.
In the author's view, a key variable in determining the speed of RMB internationalization is the change of the external environment. Last year, capital faced a large-scale outflow trend. The central bank adopted temporary controls to prevent financial risks. Now the situation has changed significantly. The dollar turning point appears and the RMB depreciation pressure is reduced. Even with the appreciation trend, foreign exchange reserves have increased month by month, and China is considering increasing the allocation of US debt. Many signals indicate that the need to maintain strict control has been reduced. In this context, it is expected that the intention of the decision-making level will be to restart RMB International. In order to improve the confidence of investors, the recent promotion of bond exchanges and the acceleration of the construction of the Belt and Road have shown this intention.
The renminbi will not be as depreciated as the previous two years. Based on the above judgments, the author does not believe that the central bank's exchange rate reform is expected to appreciate the renminbi, and the short-term renminbi strength is not a trend. Of course, although the Fed raised interest rates again in June, in my opinion, the dollar turning point has already appeared, and the euro has also rebounded. The author also does not believe that the renminbi will have a large depreciation space as in the previous two years. the reason is:
First, the weaker dollar and stronger euro will slow down the pressure of RMB depreciation. The reason why the pressure of RMB depreciation in the past two years is relatively large lies in the strong dollar, but looking into the future, this possibility is decreasing. In the US, the recent economic data shows that the market had expected the US economy to be too high, such as the non-farm payrolls data in May, which was lower than expected. Trump’s campaign targets repeatedly hit the wall, caught up in political scandals, and frequently challenged the international order. It also makes the Trump market difficult to sustain. In Europe, the political black swan event is gradually drifting away. The European economy, especially the locomotive Germany, is clearly improving. This year, the European Central Bank may withdraw from QE and provide support for the euro rebound. In addition, last year's Brexit black swan incident reversed the weakening of the US dollar. If the political risk of the UK is controllable this year, it will not affect the judgment of the dollar turning point, and vice versa will become a major risk point for the US dollar trend.
Second, ammunition for domestic monetary policy is still sufficient. As mentioned above, the central bank's reform of the exchange rate middle price formation mechanism is actually a summary of the experience of stable exchange rate operation in the past two years, which is intended to lay out in advance and reduce the cost of stable exchange rate. At the same time, domestic capital controls are still valid. It can be seen that since the US dollar was strong at the end of last year, the central bank has not only increased its direct participation in exchange rate trading, but also increased the cost of short-term renminbi in the offshore market, and adopted more administrative restrictions. Capital outflows indicate that the central bank will make flexible choices between the short-term stable exchange rate and the medium-term promotion of RMB internationalization in the context of increased capital outflow risks.
Third, domestic monetary policy tightened and narrowed the Sino-US spread. The current prevention of financial risks has become an important task. The situation of financial deleveraging in the first half of the year is very obvious. The central bank has repeatedly raised medium and short-term interest rates such as medium-term lending facilities (MLF), open market operations reverse repurchase (OMOrepo), and standing loan lending facilities (SLF), which has driven domestic market interest rates higher, and now US Treasury yields have fallen back from interest rates. From the perspective of parity, the relatively tight monetary policy will ease the impact of the Fed’s interest rate hike.
Fourth, the Chinese economy has stabilized. In the first quarter, China's economy was very strong, and consumption, investment, and net exports all performed well. In this context, the IMF also raised its forecast for the Chinese economy this year. Of course, the increase in domestic financial leverage in the first half of this year has caused China's domestic economy to fall back from the first quarter in the second quarter, but on a global scale, it still belongs to a higher level, and this year the global economy has improved significantly. The promotion is better than previous years, especially the May export data is better than expected, which means that the contribution of net exports to the Chinese economy this year is expected to turn from negative to positive, supporting the Chinese economy to stabilize.
In summary, the author believes that the possibility of a large appreciation and depreciation of the RMB this year is not great. The central bank’s exchange rate reform before the Fed’s interest rate hike is not intended to guide the appreciation of the renminbi. The high probability is to set aside policy actions for the Fed to raise interest rates. space. The weakening of the US dollar this year and the rebound of the euro will help the RMB exchange rate remain stable. It is expected that before the end of the year, the high probability of RMB exchange rate against the US dollar will fluctuate around 6.7-6.9, with a median value of around 6.8. 
After the summary of this year, the yuan has changed in the past two years against the dollar trend, the central parity against the US dollar appreciated 2.24% overall, especially in May 26 central bank exchange rate mechanism to be modified, added to the counter-cyclical factors, the yuan The trend of appreciation in the short term is very obvious...
Since the beginning of this year, the renminbi has changed its trend of depreciation against the US dollar in the past two years. The central parity has appreciated 2.24% against the US dollar. In particular, after the central bank revised the central parity mechanism on May 26 and added the countercyclical factor, the renminbi was short-term. The situation of internal appreciation is very significant. This makes the market questionable. What is the intention of the central bank to modify the middle price formula at this time? Does it mean that the central bank intends to guide the RMB exchange rate to regain the appreciation range? And the Fed’s interest rate hike in June is just around the corner, will there be any depreciation pressure on the RMB in the future? What is the trend of the RMB in the second half of the year?