We have focused our discussion on the topic of RMB many times in CAIFU magazine. During the depreciation period from 2015 to 2016, we insisted that RMB will not depreciate significantly, which was contrary to many commentators’ opinions that it would depreciate significantly. We had two reasons in 2016. First, China still had a huge trade surplus. When a country has a huge trade surplus, any currency devaluation is destined to be limited and a short-term one. The second reason was that at that time -- whether it was the United States, or Europe, or other countries, especially China – none of them wanted RMB to depreciate sharply. Something nobody wishes to happen is destined to be difficult to happen.

If the depreciation of RMB in 2015 was mainly due to capital flight and media hype, now the situation is much different. On the one hand, there’s a trade war going on between China and the United States, which is triggered by a huge trade surplus between them. On the other hand, the Chinese government’s attitude toward RMB depreciation is very different now than 2016.

During the past two months, a trade war between China and the United States has started and it spread rapidly. In the short term, it will be limited to the commodity trade field, in which, in 2017 China has $434 billion USD worth of exports to the United States, and the United States $158.5 billion USD to China. If there’s ever a full-blown trade war, China will suffer greater losses than the United States. Therefore, the market widely accepted that a trade war is more unfavorable to China, thus is unfavorable to the exchange rate for RMB, which is the main factor, causing a rapid depreciation of RMB since mid-June.

Yet another reason cannot be ignored. I It is precisely because of the Sino-U.S. trade war that the central government in China has increased its tolerance for the depreciation of RMB. Since mid-April, especially since mid-June when RMB started a rapid depreciation, the central government only gave verbal support to the RMB by the president and vice president of China’s central bank. It was until August 3 when the exchange rate of RMB against USD broke the 6.90 mark that the central bank announced a measure to stop the depreciation momentum by imposing a 20 percent of foreign exchange risk reserves to the forward sales business. This is different from the situation in 2015-16 when the government intervened from time to time while RMB depreciated sharply. This revealed that the lower limit of the RMB value that the government would tolerate, or the intervention point, has increased, taking into consideration the impact of the trade war on export enterprises.

Since China has more exports to the United States than the United States to China, China will inevitably suffer greater during the early stages of a trade war. But if the conflict continues, the war zone will expand from the current commodity trade to the areas affecting service industry, direct investment and enterprises that both have the other’s existence. Looking at all the wars in history we could conclude that, at first, whoever initiates the war always thinks he will be the winner. But once the war started, it’s easy to be out of control, so the best way is to negotiate and resolve the issues after both have suffered a certain loss.

The future development of RMB exchange rate should be following its natural flow -- to depreciate when devaluation is happening. Compared with maintaining the normal operation of the domestic economy, maintaining an exchange rate does not weigh much. The trade war should be considered for sure, but it is more important for China to watch the scope and scale of its economic policy adjustment. In response to the trade war, China’s monetary policy has shifted from moderate and tight-oriented to moderately loose. How the future depreciation of RMB will be depends on not only the changes in the export situation, but also the internal need for economic stability.

《财富世界》董事长 任大伟