On the Economy and the Renminbi

In an effort to gain a better understanding of the state of the economy and China's foreign exchange situation，China Forex interviewed Mu Zhiqian，a former consultant to the State Administration of Foreign Exchange. The discussion follows in question and answer form.

Q:In your opinion，have the Sino-US trade negotiations had much of an impact on the renminbi exchange rate? If so，to what extent?

A:Certainly the negotiations on the Sino-US trade dispute have had an effect on the renminbi. But exchange rates reflect the balance between supply and demand for different currencies. This is the embodiment of the stock and flow of international trade in the form of money. To put it simply，it is a price signal for the global economy. Therefore，trade friction has an impact，but the magnitude of the impact can vary significantly. The trade war has turned into a currency war. That is an escalation that results in huge shocks to the financial markets. We need to ensure we have the ability to deflect these risks.

Q:If a consensus can be reached between China and the United States on trade，will the renminbi appreciate? And if there is no agreement does that point to a depreciation of the Chinese currency?

A:This kind of linear reasoning is a bit simplistic. The renminbi is a sovereign currency. It is used for the pricing and settlement of international trade，investment financing，asset reserves，and for maintaining the normal operation of the domestic economy. That includes the real economy and the virtual economy. A benign external environment is definitely conducive to the stability of the renminbi exchange rate while a negative external environment poses great challenges to the renminbi exchange rate. Over the four decades of China's reform program，particularly the gradual policy adjustments after the renminbi exchange rates were merged in 1994，the Asian financial crisis and the US financial crisis，the renminbi exchange rate formation mechanism became more mature. Domestic and foreign markets are dominated by supply and demand，influenced by exchange rate fluctuations in the international financial market. A macro-prudential policy framework，countercyclical management of the currency and official guidance of market expectations are also elements that affect this market. In short，the renminbi exchange rate remains resilient，having weathered so many storms over this period.

The exchange rate is in fact the external manifestation of the health of a country's economy. As long as the Chinese economy is running smoothly，the renminbi exchange rate，which is highly correlated to the Chinese economic cycle，will move within a reasonable range.

Q:How do the offshore and onshore markets differ in terms of operation and regulations?

A:First，it is important to define the nature of these two markets. Although the transactions of the two markets are both in renminbi，the two markets occupy dif