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Outlook on RMB Exchange Rate and Internationalization

来源:CHINA FOREX 2023 Issue 1

In 2023,China's economy is expected to be stable and improving,showing a divergence from the economic fundamentals of major overseas economies,providing fundamental support for the RMB exchange rate. The current account surplus will remain large and the financial opening will continue to attract international capital inflows,which contribute tothe balance of payments surplus trend. The RMB exchange rate has a solid foundation. The Federal Reserve's (Fed) interest rate hike is slowing down,and the possibility of a rate cut within the year is not ruled out. The divergence in monetary policy between the US and China is over,which leaves more space for the RMB appreciation. The next five years are important for the orderly promotion of RMB internationalization. To advance the orderly internationalization of RMB,we are expected to pay more attention to financial security,adhere to a higher level of financial market opening,and optimize the management of cross-border capital flows.

China's economy is stable and improving,providing fundamental support for the RMB exchange rate

The economy is expected to rebound in 2023,and the annual growth rate is likely to remain above 5%,which is high among major economies. Overall,China's economy will show a high forward and low backward trend,gradually recovering from the impact of the epidemic. At the beginning of the year,China's economy showed signs of improvement,with RMB loans surging 4.9 trillion yuan in January,a record high. The increase in the scale of social financing was 5.98 trillion yuan,the second highest in history. Corporate medium- and long-term loans increased by 3.5 trillion yuan,an additional 1.4 trillion yuan year-on-year,which indicates the effect of the pro-growth measures and the improved corporate expectations. From the leading indicators,China's manufacturing Purchase Managers' Index (PMI) ended three consecutive months of decline in January and returned to the expansion range,rising to 50.1.

By contrast,major economies such as the US and the European countries are more likely to fall into recession by 2023.The inflation in the US started to rise since the second quarter of 2021. The Consumer Price Index’s (CPI) year-on-year growth rate reached 5% in May 2021 and remained above 5% for 21 consecutive months and above 6% for 16 consecutive months. In order to curb rising inflation,the Fed has consistently raised interest rates sharply. The federal funds rate rose 450 basis points from 0.25% to 4.75%,as the Fed dramatically raised interest rates. The effect of monetary policy generally has a lag effect,and the dampening effect of tight monetary policy on the economy will gradually emerge in 2023. The impact of the Russia-Ukraine conflict on Europe compared to other regions will face the test of stagflation. In 2022,GDP growth slowed quarter by quarter,and CPI growth once exceeded double digits. The ECB's aggressive rate hike strategy will also have a serious impact on economic fundamentals. A recent annual survey of 101 leading UK economists conducted by the Financial Times showed that economists expect the UK to face the most severe recession in the G7. In addition,with the combination of slowing exports and high inflation,the probability of Japan's economy falling into recession in 2023 is also rising.

The trend of balance of payments surplus continues,and the RMB exchange rate is on a firm basis

From the perspective of the current account,China's current account surplus will remain solid in 2023,supporting the RMB exchange rate. Since 2019,even after the severe impact of the global pandemic,China's current account surplus has maintained a growth trend for three consecutive years,with a surplus of more than US$400 billion in 2022,second only to the historical high of 2008 and 32% higher than that in 2021. The trade surplus in goods and the volume of imports and exports both hit record highs. The main reason behind this is that China has a complete industrial chain supply chain system,and global production and trade activities are more dependent on China's industrial chain supply chain. The IMF forecasts that China's current account balance will be US$279.29 billion in 2023,still at a high level. The Organization for Economic Co-operation and Development (OECD) forecasts the figure to be US$519.176 billion,the highest since the agency has relevant forecast data.

From the perspective of capital and financial projects,the amount of actual foreign investment utilized in China has generally maintained an upward trend in the past 20 years,and has been steadily increasing for the last six consecutive years,indicating that China's attractiveness to foreign capital has been increasing under the continuous improvement of the business environment. In 2022 China attracted a net inflow of US$190.3 billion of inward FDI,reflecting China's advantages in the industrial chain supply chain and its large national unified market still attractive for international long-term capital. FDI capital inflow is expected to maintain a rising trend in 2023. Since the beginning of the year,capital flows to the mainland capital market through channels such as Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock

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