On the morning of January 13th, Reuters reported that the RMB exchange rate has seen a sharp rise in the Year of the Horse. While the notion of an immediate reversal of years-long appreciation is unrealistic, the RMB is expected to officially enter the "5" era, marking a new phase in its exchange rate dynamics.
With the RMB nearing its equilibrium level and the Federal Reserve’s exit from quantitative easing already underway, emerging economies are facing capital outflows, which could ease pressure on the RMB's appreciation and create a more flexible market environment for bilateral exchange rates. However, China's economic growth outlook and the imbalances in its current account continue to support the RMB's upward trend, making it difficult to shake off the "appreciation" label.
In 2014, China is set to continue pushing forward with RMB exchange rate reforms. It is expected that the daily trading band for the RMB against the US dollar will be expanded, and there may be a reduction in regular interventions by the central bank. More importantly, the opening of the RMB capital account is likely to be a key breakthrough in 2014.
According to Wen Bin, head of economic research at the Bank of China International Finance Research Institute, the RMB exchange rate is theoretically close to equilibrium. However, after the exit of QE, the real effective exchange rate of the RMB is expected to rise in 2014, potentially leading to appreciation not only against other currencies but also against the US dollar.
He explained that while the RMB exchange rate appears close to equilibrium based on trade surplus-to-GDP ratios, the impact of cross-border capital flows—driven by "wide-in and strict-out" policies and high interest rate differentials—has not yet reached equilibrium. This dynamic continues to fuel RMB appreciation through arbitrage and trade finance activities.
Liu Dongliang, senior analyst at China Merchants Bank, noted that 2014 marks the tenth year of RMB exchange rate reform. The demand for moving from one-way appreciation to two-way floating is growing, but no major breakthroughs are expected this year. The momentum of RMB appreciation is likely to persist until the central bank grants more pricing power to the market.
Meanwhile, Liu Dongmin, deputy director of the International Finance Research Office at the Chinese Academy of Social Sciences, expressed optimism about the progress of exchange rate reforms in 2014. He suggested that although a rapid opening of the capital account may not be advisable due to short-term capital risks, a gradual and controlled approach could still be a highlight of the Year of the Horse.
In 2013, the RMB appreciated by 2.91% against the US dollar, significantly faster than the 1% gain in 2012. This marked the fourth consecutive year of unilateral appreciation since 2009. Since the 2005 exchange rate reform, the RMB has appreciated by 36.7%, with only a small depreciation in 2009 during the financial crisis. All other years have shown consistent appreciation.
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