On January 13th, Reuters reported that the RMB exchange rate has seen a sharp rise in the Year of the Horse. While this upward trend is not entirely unrealistic, a sudden reversal of years of steady appreciation is unlikely. The RMB is expected to officially enter the "5" era, signaling a new phase in its exchange rate dynamics.
With the RMB nearing its equilibrium level and the Federal Reserve’s withdrawal from quantitative easing (QE) already underway, emerging markets are experiencing capital outflows, which could ease pressure on the RMB’s appreciation and create a more balanced environment for bilateral exchange rate fluctuations. However, China’s strong economic growth prospects and the ongoing imbalance 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 expected to push forward with RMB exchange rate reforms. It may announce an expansion of daily trading bands for the RMB against the US dollar and reduce routine interventions in the foreign exchange market. More notably, the opening of the RMB capital account is likely to be a key focus for the year.
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 from QE, the real effective exchange rate of the RMB is expected to rise in 2014, potentially leading to appreciation against both other currencies and the US dollar.
Wen explained that while the RMB appears close to equilibrium based on trade surplus-to-GDP ratios, the impact of cross-border capital flows—driven by strict capital outflow controls and high interest differentials—suggests that the RMB is still undervalued. These factors, along with arbitrage opportunities and trade finance activities, continue to fuel RMB appreciation.
Liu Dongliang, senior analyst at China Merchants Bank, noted that 2014 marks the tenth year of RMB exchange rate reform. There is growing demand to move away from one-way appreciation and toward a two-way floating system. However, he does not expect major breakthroughs in 2014, as the central bank will likely retain significant control over exchange rate pricing for some time.
On the other hand, Liu Dongmin, deputy director at the Chinese Academy of Social Sciences’ International Finance Research Office, expressed optimism about the pace of exchange rate reforms in 2014. He emphasized that while full capital account liberalization should be approached cautiously due to risks from short-term capital flows, a gradual and strategic opening of the RMB capital account could be a positive development.
In 2013, the RMB appreciated 2.91% against the US dollar—the fastest annual gain since 2012, which saw only 1% appreciation. This marked the fourth consecutive year of unilateral appreciation since 2009. Since the 2005 exchange rate reform, the RMB has appreciated 36.7%, with the only exception being a small depreciation in 2009 due to the global financial crisis.
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