The RMB exchange rate is approaching the 5th era

The RMB has shown a renewed upward trend after a period of adjustment, with the spot exchange rate against the US dollar hitting a key milestone in October. On the 24th, at around 14:00, the rate approached 6.00, marking the highest level since the 2005 exchange rate reform. While the median price didn't hit a new high compared to the previous day, the breakthrough signaled a shift in market sentiment. Experts suggest that the "5th era" of the RMB is becoming more tangible. Despite weak global demand, the appreciation of the yuan has put pressure on export companies, squeezing their profit margins. However, industry analysts believe that this does not mean policy makers will become less tolerant of the RMB's rise. With the internationalization of the RMB and the ongoing liberalization of domestic interest rates, there's a growing need for the exchange rate mechanism to become more market-driven. Now is the time for the RMB to move closer to its equilibrium level. On October 24, the spot exchange rate reached 6.0808, a new high since the reform. Since August, the rate had hovered around 6.2, but in October, it began to appreciate rapidly. The RMB broke through several key levels—6.12, 6.11, 6.10, and 6.09—showing a consistent upward trend. Overall, the RMB has appreciated over 0.6% against the dollar this month. The central parity of the RMB also hit record highs for five consecutive days in October, up 2.4% from the start of the year. Offshore RMB followed suit, with the USD/CNH rate settling at 6.0817 on the 24th. Recent data from the Bank for International Settlements showed the RMB’s real effective exchange rate index rising to 117.4 in September, indicating continued strength. The strong central parity is linked to a weaker dollar. Factors such as the Fed’s delayed exit from quantitative easing, U.S. debt negotiations, and underwhelming employment data have weighed on the dollar. The U.S. dollar index dropped from 84 to 79 over the past few months, supporting the RMB’s appreciation. According to Zhao Qingming, an international financial expert, the RMB’s exchange rate mechanism is based on a basket of currencies, with the U.S. dollar serving as a key reference. When the dollar weakens, the RMB tends to strengthen. He noted that the recent surge in RMB appreciation reflects stronger market expectations, especially after liquidity improved in August. This trend has led to a reversal in foreign exchange flows. In June and July, financial institutions saw a decline in foreign exchange reserves, but since August, the trend has reversed, with a significant increase in September. This suggests growing confidence in the RMB. However, the appreciation has created challenges for export firms. Many companies report that while external demand remains weak, the rising RMB has further compressed their margins. Some businesses are trying to hedge against currency fluctuations, while others are raising prices, risking customer loss. A survey of small and medium-sized foreign trade enterprises in the Pearl River Delta found that 20% of companies have canceled orders due to exchange rate volatility. With the RMB nearing the “6” threshold, many fear a potential impact on the light industry and other sectors. Despite these concerns, experts like Bai Ming argue that the RMB’s appreciation is still far from equilibrium. The RMB remains undervalued, and further adjustment is expected. Analysts predict a possible range of 5.8 to 6.0 for the RMB, though they caution that rapid appreciation may not be ideal either. In summary, the RMB’s recent performance highlights both opportunities and challenges. While the appreciation reflects economic strength, it also poses risks for export-oriented industries. As the RMB continues to move toward its equilibrium, the balance between stability and market forces will remain critical.

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