As of 18:51 pm on December 28, 2022, the onshore RMB/USD exchange rate was at 6.9744, an appreciation of over 3500 basis points from the low of 7.3280 in October for the year; The offshore RMB/USD exchange rate was at 6.9781, an appreciation of nearly 4000 basis points from the intra-year low of 7.3748 in October.

In just two months, the market has stopped discussing the depreciation of the RMB, and on investor interaction platforms, investors have even begun to ask how the appreciation of the RMB affects the performance of listed companies.

The widely held view in the industry is that the signal of slowing interest rate hikes released by the Federal Reserve on the other side of the ocean has alleviated the pressure on the Chinese yuan to depreciate. At the Federal Reserve's interest rate meeting in early November, most Fed officials stated that the pace of interest rate hikes should be slowed down as soon as possible to reduce the risk of excessive tightening. This indicates that they are inclined to raise interest rates by 50 basis points in December.

At the December interest rate meeting, the Federal Reserve raised the target range of the federal funds rate by 50 basis points to 4.25% -4.5%, in line with market expectations. This is the first time the Federal Reserve has slowed down its rate hike since starting its current rate hike cycle in March this year, with the previous four rate hikes of 75 basis points. The dot matrix chart shows that most Federal Reserve officials expect interest rates to be between 5% and 5.5% by the end of 2023.

Although there are still differences in the market regarding the pace of future interest rate hikes by the Federal Reserve, based on the dot chart and the reality of five consecutive months of declining inflation in the United States, the current federal funds rate is not far from its peak. Federal Reserve Chairman Powell continued to play the role of "Tai Chi" at the press conference after the interest rate meeting, releasing hawkish signals while also conveying a hint of "dove sound".

Powell stated that the longer this round of high inflation lasts, the greater the likelihood that expectations will become entrenched. Therefore, the Federal Reserve will be firmly committed to the goal of restoring inflation to 2%, and there is still some way to go before raising interest rates. But he also said that the Federal Reserve has acted very quickly, and the appropriate approach is to slow down the pace of interest rate hikes, which will also help us better balance risks.

At present, the onshore and offshore RMB/USD exchange rates have both recovered to the 7 level and hovered above 7 for several days, showing a strong trend of stability. A natural question is whether the exchange rate of the Chinese yuan against the US dollar has reversed its decline and entered a stage of appreciation?

The RMB exchange rate is expected to stabilize and rise slightly next year

21st Century Economic Report reporters have learned from various sources that the industry generally holds a relatively optimistic attitude towards the performance of the RMB exchange rate next year. On the one hand, it is based on the consensus of the Federal Reserve to slow down interest rate hikes, and on the other hand, it is due to the confidence in the domestic economic recovery after the optimization of epidemic policies.

Wang Qing, Chief Macro Analyst of Dongfang Jincheng, told reporters that there will be a certain degree of depreciation of the RMB against the US dollar in 2022, which is mainly driven by two factors. One is that the Federal Reserve's policy tightening pace is significantly faster than that of the European and Japanese central banks, which has driven the US dollar index significantly higher, causing the renminbi to depreciate against the US dollar under the price comparison effect. The second is that the two rounds of domestic epidemics after April have caused disturbances to the economic operation, which has had a certain impact on the expected foreign exchange market.

Looking ahead to 2023, Wang Qing predicts that both factors driving the depreciation of the RMB will weaken, and the RMB exchange rate is expected to strengthen again. On the one hand, as inflation in the United States continues to cool, the pace of the Federal Reserve's interest rate hike will further slow down, and it is possible to end this round of interest rate hikes around the middle of next year. The European and Japanese central banks will maintain a stronger tightening stance to suppress their own inflation momentum. Overall, the US dollar index is prone to decline but difficult to rise in 2023, and the price comparison effect may drive the appreciation of the RMB against the US dollar. On the other hand, the domestic economy will definitely shake off the impact of the epidemic next year, and GDP growth is expected to rebound significantly. The price situation will continue to maintain overall stability. From this perspective, the domestic economic fundamentals also support a moderate rebound in the RMB. It is expected that the central exchange rate of the RMB against the US dollar in 2023 will rise by about 5.0% from the current level, reaching around 6.6.

Chang Ran, a senior researcher at Zhixin Investment Research Institute, also holds a similar view. She predicts that the RMB exchange rate will return to a two-way fluctuation trend in 2023, with a probability of stabilizing and appreciating. There are two main reasons: firstly, the domestic economy is basically oriented towards good development, which forms support for the RMB exchange rate. With the continuous optimization of epidemic prevention and control policies, it will promote improvement in consumption, repair of domestic demand, and economic recovery. Policies such as the "Three Arrows" and the "Sixteen Financial Measures" for real estate have been successively introduced, which will also help resolve risks in the real estate market and stabilize the decline. The domestic economic fundamentals may gradually improve.

Secondly, the sustained upward movement of the US dollar index is limited, which weakens the depreciation pressure on the RMB exchange rate. At the November and December FOMC meetings, Federal Reserve Chairman Powell also stated that the intensity and pace of subsequent interest rate hikes will be marginally slowed down. The Federal Reserve's interest rate hikes in 2023 may gradually decline, and monetary policy may remain neutral and be contemplating relaxation. At that time, the US dollar may gradually decline from its high point.

In the view of the Chief Economist of CITIC Securities (600030), the RMB faced internal and external pressure in the early stage. The external pressure was mainly due to the Federal Reserve's continuous interest rate hikes, the US dollar index continuously rising, and the internal pressure was mainly due to the relatively weak economic recovery in China, as well as increased capital outflow pressure from securities accounts. Currently, external pressure has slowed down, with the Federal Reserve raising interest rates slowing down, the peak of the US dollar index having passed, and non US currencies generally appreciating. For internal pressure, domestic epidemic policies continue to be optimized, and economic recovery expectations continue to improve. However, due to the increase in the number of confirmed cases, strong expectations have not yet reversed the weak reality. Therefore, under the weak reality of economic fundamentals, in the short term, the RMB may maintain its current level of volatility. However, in the future, with the continuous improvement of economic fundamentals, there may be further momentum for RMB appreciation. However, due to the slowdown in exports, the magnitude of RMB appreciation may not be as significant as the period from 2020 to 2021.

Public data shows that the onshore and offshore RMB exchange rate against the US dollar has rebounded from around 7.14 in May 2020 to around 6.37 in December 2021, with an appreciation rate of over 5%.

Don't "bet" on unilateral appreciation of the RMB exchange rate

However, although industry experts are generally optimistic about the trend of the RMB exchange rate next year, they do not recommend that everyone "bet" on the unilateral appreciation of the RMB exchange rate, as there is nothing absolute in the financial market and risk factors will always exist.

Wu Dan reminds that considering the uncertainty of the Federal Reserve's expected policy shift next year, the increasing impact of the turbulent external environment on domestic demand, and the potential impact of weak external demand on China's trade exports, attention should still be paid to potential cross-border capital flow risks. In addition, the risk of global economic stagflation has increased, and the cycle of commodity and energy price fluctuations has not come to an end. Input inflationary pressures still need attention. These all bring uncertainty to the trend of the RMB exchange rate next year.

Zhou Ji, a foreign exchange analyst at Nanhua Futures, believes that the key support for the sustained strength of the RMB exchange rate next year is whether the domestic economic fundamentals can smoothly recover from the current "weak reality" state. Overall, domestic macro factors are favorable for the future trend of the RMB exchange rate, and the biggest risk point is that the domestic economic recovery is less than expected. In addition, the attitude of the central bank tow