The RMB exchange rate is approaching the 5th era

After a period of adjustment, the RMB has made a strong comeback in October, showing a breakout trend. Although the mid-price did not reach a new high compared to the previous trading day, the onshore exchange rate of the RMB against the US dollar hit 6.00 around 2:00 PM on the 24th, marking the highest level since the exchange rate reform. The "5th era" of the RMB seems to be approaching. Amid weak global demand recovery, the appreciation of the RMB has further squeezed the profit margins of export companies. However, industry experts stated that while the appreciation may have an impact on exports, it doesn’t mean policymakers will reduce their tolerance for the RMB’s rise. With the internationalization of the RMB and the acceleration of domestic interest rate marketization, the exchange rate mechanism must be further liberalized. Now is the time for the RMB to move closer to its equilibrium level. **Spot Exchange Rate Breaks Through Key Barriers** On the 24th, the onshore RMB/USD exchange rate hit a new high since the exchange rate reform, reaching 6.0808 around 2:00 PM. Since August, the RMB has been hovering around 6.2, but in October, the pace of appreciation accelerated. The exchange rate broke through key levels such as 6.12, 6.11, 6.10, and 6.09. By the end of October, the RMB had appreciated more than 0.6% against the USD. The central parity of the RMB against the USD also reached record highs for five consecutive days in October. Compared to the start of the year, the central parity has appreciated by 2.4%. Offshore RMB followed a similar trend, with the USD/CNY (Hong Kong) rate settling at 6.0817 on the 24th—its fourth consecutive daily rise. Recent data from the Bank for International Settlements (BIS) also supports these trends. The real effective exchange rate index of the RMB in September stood at 117.4, up 0.3 points from the previous month. It briefly dipped in August but then surged to a record high. The strong central parity of the RMB is closely tied to the weakening U.S. dollar. Factors like the Fed's delayed exit from quantitative easing, ongoing U.S. debt negotiations, and weak employment data have all weighed on the dollar. As a result, the U.S. Dollar Index dropped from 84 in July to 79 currently. Experts suggest that the RMB’s exchange rate mechanism, which references a basket of currencies, is influenced by the U.S. dollar index. When the dollar weakens, the RMB tends to strengthen, as seen in recent months. **Appreciation and Impact on Export Enterprises** The rapid appreciation of the RMB has raised concerns among Chinese exporters. Many companies report that external demand hasn’t improved significantly this year, and the rising RMB is squeezing their already thin profit margins. Some companies are calling for a slower pace of appreciation to ease pressure. A Zhejiang-based small appliance manufacturer told reporters that the RMB has appreciated by 2% so far this year, while profit margins in the electronics sector are only 4-5%. This means profits have been cut in half. Light industries are also feeling the strain, with some fearing a potential “6 yuan” threshold could be devastating if reached before the end of the year. In response, some companies are using financial instruments to hedge against currency risk, while others are raising prices to offset losses. However, price increases often lead to lost customers, and smaller firms with limited bargaining power are forced to accept lower profits just to keep orders. A survey of over 1,000 SMEs in the Pearl River Delta found that 20.09% of businesses have canceled orders due to exchange rate fluctuations. On average, each company has lost $578,000 in orders since 2013. Most SME owners now see RMB appreciation as one of the biggest challenges for their export business. **Outlook: RMB Should Return to Equilibrium Faster** As the RMB approaches the psychological level of 6, the market is closely watching its future direction. Since the 2005 exchange rate reform, the RMB has appreciated by over 35%, and it continues to move closer to its equilibrium level. However, determining what that level is remains complex. Experts believe that with China’s continued current account and capital account surplus, the RMB is still undervalued and has room to appreciate further. While short-term pressures from capital inflows and delayed Fed policy may push the RMB higher, the central bank may intervene to prevent excessive appreciation. Despite the challenges, many analysts argue that faster appreciation is not necessarily bad. A swift move toward equilibrium can help avoid long-term imbalances. As one expert put it, “When it reaches the limit, it will return quickly; otherwise, it won’t turn around.”

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