On August 26, the US dollar opened at 7.1319 against the onshore RMB, which was nearly 500 points lower than the closing price of 7.0825 on the previous trading day, and then fell further, hitting 7.1500 before recovering slightly; in the offshore market, The US dollar opened at a low of 7.1751 against the RMB, down nearly 400 points from the previous trading day's closing price of 7.1355. As of 12:33, the US dollar against the RMB was at 7.1430, and the US dollar against the offshore RMB was at 7.1660.

Industry experts believe that the decline of the RMB was first due to the strengthening of the US dollar. On the other hand, it is very normal for the exchange rate to rise and fall.

The Chinese market’s resilience to external shocks is significantly increasing. Wang Chunying, spokesperson and chief economist of the State Administration of Foreign Exchange, recently stated that my country’s foreign exchange market has maintained good order since August. Judging from the foreign-related transactions of my country's enterprises, individuals and other market entities, banks have shown a small surplus in foreign exchange settlement and sales since August, and cross-border receipts and payments have remained basically balanced.

"This fully reflects the supporting role of domestic economic fundamentals in the stability of the foreign exchange market, indicating that our country's foreign exchange market is more mature and rational, and can better absorb and adapt to changes in the external environment. We will continue to maintain the continuity and stability of foreign exchange management policies, continuously improve the level of liberalization and facilitation of cross-border trade and investment, further consolidate the foundation for the smooth operation of the foreign exchange market, and serve the development of the real economy and the new pattern of the country's comprehensive opening up to the outside world." Wang Chunying said.

The chief analyst of fixed income at CITIC Securities Research Department Mingming told China Business News that the analysis of exchange rates should still return to fundamentals. Generally speaking, trade was relatively stable in the first seven months of this year, and the entire export in July was slightly higher than expected. If the entire export remains relatively stable, the exchange rate will generally remain stable, and the overall risk will be small.

Exchange rate expectations tend to be stable

Generally speaking, the monthly contract amount of forward foreign exchange settlement and sales and the current monthly amount of spot foreign exchange settlement and sales are regarded as two data reflecting the RMB exchange rate expectations.

On August 19, the latest data released by the State Administration of Foreign Exchange showed that banks’ foreign exchange settlement and sales and foreign-related receipts and payments became more balanced in July, the deficit in foreign exchange settlement and sales narrowed significantly, and exchange rate expectations stabilized.

In July, banks settled US$161 billion in foreign exchange and sold US$167.1 billion. The deficit in foreign exchange settlement and sales was US$6.1 billion, which was US$3.3 billion smaller than the same period last year and a month-on-month decrease of 68%. Among them, the difference in the contract value of forward foreign exchange settlement and sales in July was US$11.293 billion, an increase of US$1.568 billion compared with June.

Li Yiju of the Bank of China Institute of International Finance believes that this reflects the current decline in market depreciation expectations and the existence of certain appreciation expectations. Although the monthly amount of spot foreign exchange settlement and sales was not directly announced, according to calculations, the difference in spot foreign exchange settlement and sales in the month was US$1.297 billion. Compared with June, it turned from a deficit to a surplus, an increase of US$23.937 billion, indicating that depreciation expectations in the exchange rate market have been fully released.

Wang Chunying said in response to reporters’ questions on the foreign exchange receipts and payments situation in July that cross-border capital flows through major channels were stable and improving. "On the one hand, market entities' willingness to settle foreign exchange has increased and their willingness to purchase foreign exchange has weakened; on the other hand, cross-border capital inflows under corporate trade in goods, direct investment, etc. have continued and increased, and individual foreign exchange purchases have become more stable."

Data show that in July, the willingness to settle foreign exchange was measured. The settlement rate, that is, the ratio of customers' foreign exchange sales to banks to customers' foreign exchange income, was 67%, a month-on-month increase of 5 percentage points; the sales exchange rate, which measures the willingness to purchase foreign exchange, is 69%, a month-on-month decrease of 1 percentage point.

In addition, foreign-related receipts and payments for trade in goods and foreign exchange settlement and sales both expanded month-on-month. Direct investment, securities investment foreign-related receipts and payments, and foreign exchange settlement and sales showed a stable surplus. Personal foreign exchange purchases fell by 8% year-on-year.

Li Yiju said that compared with June's data, overall, the current willingness of market entities to purchase foreign exchange has increased, while their willingness to sell foreign exchange has declined. Market expectations are not volatile, and cross-border capital outflows have slowed down.

"Three prices in one" in the foreign exchange market

In early August, the RMB exchange rate against the US dollar declined to a certain extent. However, after experiencing the initial shock, the market has initially absorbed the impact of the RMB breaking 7, and the RMB exchange rate is expected to be stable.

From the perspective of domestic and foreign exchange rate spreads, CNH (offshore RMB) continues to be weaker than CNY (onshore RMB), but the spread has not continued to expand. For example, on August 20, the domestic and foreign price difference shrank from 310 basis points on the 19th to 75 basis points, to 49 basis points on the 21st, and to 21 basis points on the 22nd.

On the 20th, at the State Council's regular policy briefing, Sun Guofeng, director of the Monetary Policy Department of the People's Bank of China, said that currently, the central parity rate of the RMB against the US dollar, the onshore market exchange rate, and the offshore market exchange rate have been "three prices integrated into one", indicating that market expectations are generally "This also confirms what we have said before, "7" is neither an age nor a dam."

Li Yiju believes that due to external factors in early August, the RMB exchange rate against the US dollar "broke 7", and there is a certain degree of depreciation expectations in the foreign exchange market. However, after the central bank successfully issued 30 billion yuan of offshore central bank bills in Hong Kong, the expectations of the exchange rate market have stabilized.

A noteworthy phenomenon is that despite changes in external factors over the past year or so, enterprises, residents, and financial institutions have maintained a rational and objective view of the RMB exchange rate, and have demonstrated strong adaptability to normal fluctuations in the exchange rate.

Take bank foreign exchange settlement and sales and individual foreign exchange settlement and sales as an example. In 2015 and 2016, the bank's foreign exchange settlement and sales deficit was 465.9 billion U.S. dollars and 337.7 billion U.S. dollars respectively. In 2017, the bank's foreign exchange settlement and sales deficit narrowed to 111.6 billion U.S. dollars. The deficit further dropped to US$56 billion in 8 years, and the deficit was US$33.2 billion in the first half of 2019; the scale of personal foreign exchange purchases fell by 20% and 7% year-on-year respectively in 2017 and 2018, and further dropped by 19% year-on-year in the first half of 2019.

"In recent years, the flexibility of RMB exchange rate fluctuations has continued to increase, effectively playing the role of an 'automatic stabilizer' in the balance of payments. Looking back on the RMB exchange rate trend in the past few years, although the exchange rate has risen and fallen, overall the RMB is still a strong currency among major international currencies." Recently, Lu Lei, deputy director of the State Administration of Foreign Exchange, said in an exclusive interview with a reporter from China Business News.

In addition, the central bank has not intervened in the foreign exchange market recently. The "monetary authority balance sheet" updated by the central bank on August 14 showed that at the end of July 2019, the central bank's foreign exchange balance was 21,244.812 billion yuan, a month-on-month decrease of 708 million yuan, still fluctuating near "0". At the end of July, the balance of foreign exchange reserves was US$3.1 trillion, a decrease of US$15.5 billion from the previous month. "Exchange rate conversion factors are the main cause of changes in foreign reserve balances," said Xie Yaxuan, chief macro analyst at China Merchants Securities.