Potential $14 Trillion Fund Shift: Could RMB Appreciate by 20%?
It is likely that the last thing the United States wishes to see is the return of capital from Chinese manufacturing companies back to China.
Since the Federal Reserve began raising interest rates in 2022, Chinese enterprises have parked around $2 trillion in deposit accounts in American banks, attracted by the high interest rates offered.
However, this situation has recently undergone a significant change, with export enterprises showing a pronounced increase in their willingness to convert currency since July of this year.
As of August 28, the offshore renminbi exchange rate has appreciated from 7.3 to a high near 7.1, while the dollar index has clearly entered a depreciating trend since July, reaching a new low of 100.51 last night.
Given the current situation, the appreciation of the renminbi and the depreciation of the dollar have become a consensus, and after the September rate cut by the Federal Reserve, more companies are likely to choose to convert their dollars into renminbi for repatriation.
What impact will the repatriation of over $2 trillion in funds to China have on the dollar? How will the appreciation of the renminbi affect China?
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Goods have been sold, but the money has not returned
According to data from Morgan Stanley, since the Federal Reserve began raising rates in March 2022, Chinese export enterprises have adopted a very cautious attitude towards currency conversion.
The main reason is that the deposit rate in American banks is as high as 5.25%, while the deposit rate in China is only around 2%.
Coupled with expectations of further interest rate hikes in the U.S., the offshore renminbi exchange rate fell from 6.3 to 7.3 in March 2022, indicating a depreciation of 15%.
Under the pressure of high interest rates and currency depreciation, Chinese enterprises have had no choice but to forgo currency conversion, as the depreciation of the renminbi has been too rapid since March 2022.
If they were to convert currency easily, it would be tantamount to incurring losses for export-oriented companies; it is better to keep the money in American banks and earn a 5% interest instead.
Before July this year, the currency conversion rate for Chinese export enterprises had dropped to a historical low of only 13.5%—meaning that for every $100 in export revenue, Chinese companies only converted $13.5 into renminbi.
However, once the Federal Reserve adopts a strategy of lowering interest rates, the interest rate differential between China and the U.S. will narrow, and dollar assets will undoubtedly lose their previous appeal. According to our conservative estimates, approximately $1 trillion in funds may flow back into the Chinese market.
According to exclusive reports from Caixin Media, many senior managers in export-oriented enterprises have indicated that since late July, they have been swiftly converting any payments received in dollars into renminbi.
In addition to the emotional impetus brought about by the “rate cut trade” and the reversal of yen carry trades, the peak currency conversion period for Chinese enterprises at the end of the year will also exert significant pressure on the depreciation of the dollar.
How much volatility can a concentrated conversion from so many enterprises cause in the international foreign exchange market, and who faces more pressure, the dollar or the renminbi?
Dollar assets will depreciate significantly
According to accurate calculations by CITIC Securities, a conversion amount of approximately $10 billion is theoretically sufficient to support an increase in the renminbi to dollar exchange rate by about 1000 basis points (or 0.1%).
If foreign trade companies can attract a total of $1 trillion in funds back to the domestic market, it is expected that the renminbi will appreciate by about 10% in the short term;
If they can successfully attract all $2 trillion, the renminbi exchange rate could even rise by 20%.
Meanwhile, as one of the most influential currencies globally at this stage, the appreciation of the renminbi also signifies the depreciation of the dollar.
From September onwards, dollar assets will face enormous depreciation pressure.
Looking ahead, especially after 2023, the default rate on U.S. housing will gradually rise; recent data shows this figure has remained above 4% as of July this year.
This data reveals that many households and homebuyers are facing repayment difficulties in the current economic environment, making it increasingly challenging to repay loans, leading to a growing phenomenon of defaults.
If we extend the statistical data, this default rate has already surpassed the warning line drawn during the subprime mortgage crisis of 2008.
In the future, if a large amount of capital is withdrawn from the U.S., it will have a significant impact on the American real estate market.
Therefore, this time the Federal Reserve’s rate cut is likely to have a massive impact on the U.S. economy, whereas the repatriation of $2 trillion will further elevate the prices of domestic assets in China.
The prices face inflationary pressure
However, regarding the exchange rate of the renminbi, neither too rapid depreciation nor too rapid appreciation is favorable.
The China Banking and Insurance Regulatory Commission has repeatedly emphasized not to bet on a unilateral movement of the renminbi's exchange rate; what foreign trade companies in China need is a stable and healthy renminbi exchange rate market.
This ensures a good balance between the cost of imported raw materials and the pricing of exported goods, allowing companies to earn stable profits.
In addition, the influx of hot money could also lead to rising prices and upward inflation, which are potential challenges the Chinese financial sector may face in the future.
Therefore, we must be prepared for necessary adjustments, particularly in terms of people's livelihoods, and increase supply to stabilize prices when necessary.
According to estimates by major international investment banks, by the end of this year, the renminbi is expected to maintain a stable appreciation, with the offshore renminbi exchange rate likely appreciating to around 6.8-6.9.
As the exchange rate rises, by 2025, more international speculative capital will likely seize the opportunity to go long on the renminbi for profit.
When the People’s Bank of China holds excessive foreign exchange reserves, selecting overseas investment projects becomes a challenging task.
Therefore, it is expected that in the second half of this year, the central bank may choose to continue increasing its holdings of U.S. Treasury securities to alleviate the pressure caused by holding excessive dollar assets.
However, in the international market, the benefits of the renminbi's appreciation are significant, as a healthy and promising sovereign currency will promote the internationalization of the renminbi, leading to an increasing number of countries using the renminbi for international trade in the future.
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