As of now, the exchange rate of the Chinese yuan against the US dollar has dropped to 7.15, compared to 6.3 in March 2022, the yuan has depreciated by almost 10%. This is also the third time since August 2019 that it has broken through the 7 mark.
Another issue is that with the US dollar's interest rate hikes, our country's central bank has adopted an independent monetary policy. Since the beginning of this year, our country's central bank has successively implemented three interest rate cuts, which can be said to be the opposite of the US's monetary policy.
A key point is that the yuan exchange rate breaking through 7 is a psychological threshold for everyone. Now that the yuan has broken through 7, is 8 far away? People have formed an expectation of the yuan's continuous depreciation, which will further accelerate the depreciation of the yuan.
Today, I will first discuss whether the yuan will break through 8 under the strong interest rate hikes of the US dollar?
On this point, I will discuss from the following aspects.
Firstly, the last time the yuan exchange rate broke through 8 was in May 2006, which was also the last time it broke through 8 in 13 consecutive years since 1994. After that, the yuan began to appreciate all the way, reaching 6.3 at the beginning of this year. The ultimate reason is that after our country joined the WTO, the ability to earn foreign exchange became stronger, and the economic volume also increased.
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In 2006, China's trade surplus was 177.47 billion US dollars, while in 2021 it reached 676.43 billion US dollars, which is the highest value since records began in 1950. Our country's foreign exchange reserves also increased from 1.07 trillion US dollars in 2006 to 3.12 trillion US dollars at the end of May 2022, which is three times that of 2006 and twice that of Japan's foreign exchange reserves, and has been the world's first for 17 consecutive years.
In addition, our country's economic volume has also increased from 21.94 trillion yuan in 2006 to 114 trillion yuan in 2021, becoming the world's second-largest economy.
We all know that a country's huge economic volume and substantial foreign exchange reserves can balance the exchange rate of its own currency. We can understand this point by looking at the recent depreciation of other currencies.
Now, the euro against the US dollar exchange rate has broken through the 0.99 mark for the first time in 20 years; the pound against the US dollar has also reached the lowest level since 1985; the yen against the US dollar exchange rate has also reached the lowest value since August 1998; the won against the US dollar exchange rate has also broken through the 1400:1 mark, reaching the lowest value since 2009; the Turkish lira against the US dollar exchange rate has broken through the 18:1 mark, depreciating by about 26%; the Indian rupee and the Vietnamese dong have both reached historical lows.The Chinese yuan has merely broken through the 7:1 mark, with the last time it breached 7 occurring only in September 2019. It can be observed that the devaluation of the Chinese yuan relative to other currencies has already been quite minimal.
Therefore, speaking from this perspective, even if the US dollar continues to aggressively raise interest rates, and the Chinese yuan really does break through 8, we would have more means and policies, as well as a certain level of strength, to suppress it.
Secondly, if the Chinese yuan exchange rate really needs to return to the era of breaking 8 in 2006, this would mean that the yuan would have to depreciate by another 14% from its current level. Firstly, this phenomenon has not occurred since 2006. Furthermore, a 14% devaluation of the yuan would imply an even greater devaluation of other currencies.
Let's take the Japanese yen as an example; if the yuan were to break through 8, the depreciation of the yen would reach over 50%. Since September 2021 to September 2022, the yen has already depreciated by 32% against the US dollar. This means that at that time, the US would only need to pay half the price to aggressively acquire high-quality Japanese assets. Additionally, other currencies such as the South Korean won, rupee, and Turkish lira would also be in a dire situation.
If the US were to really wield the sickle without restraint and cut the leeks indiscriminately, one can imagine what would happen then? That would be an acceleration in the global movement towards de-dollarization. Would the US dare to do so?
Therefore, from the perspective of global economic development, it is feared that the world would not allow the yuan to break through 8.
Moreover, the most recent instance of the US dollar's aggressive interest rate hike was from June 2004 to July 2006, during which the US dollar raised interest rates by a total of 425 basis points. When the US dollar's interest rate hikes ended, the yuan appreciated from 8-something to 7.97 against the US dollar. This also means that after the US dollar's interest rate hikes, the yuan was actually appreciating. This mainly depends on the rapid development and growth of our country's economy.
Furthermore, the US dollar increased by a total of 225 basis points from March to July this year. Even if the US dollar raises interest rates again, it is impossible to reach 425 basis points. If it continues to raise interest rates without any bottom line, the US's own real economy and stock market would also collapse, and the US would not do so. Of course, the yuan would not break through 8 either.
Therefore, whether it is from the perspective of the US's own interests, the global economic perspective, or the hard strength of our country's economy, short-term fluctuations in the yuan may be possible in the future, but breaking through 8 is an absolutely impossible event.
Next, let's discuss another issue: will housing prices rise if the yuan depreciates?Firstly, the depreciation of the Chinese yuan can be divided into external and internal depreciation. The recent devaluation of the yuan is due to the interest rate hikes by the US Federal Reserve, leading to the outflow of US dollars and consequently causing the yuan to depreciate. This is a different matter from the yuan being excessively printed, and thus there is no inevitable correlation between the decline in exchange rates and the rise in housing prices.
Just as there was a period when the yuan depreciated internally but appreciated externally, at that time, housing prices soared, and the exchange rate also appreciated. Therefore, there is no certain inevitable correlation between the two; they only exhibit opposite trends under specific circumstances. Hence, whether housing prices will rise mainly depends on the overall market demand and policy promotion, rather than fluctuations in the yuan's exchange rate.
Regarding the future trend of housing prices, the country is still implementing a stability maintenance policy. Including this year, the central bank has successively implemented three interest rate cuts, and the benchmark interest rate for the real estate market has reached a 20-year low. These policies are all beneficial to the real estate market. Currently, in response to the downward pressure on the real estate market, the country's policy relaxation can be said to be at its highest level since 2016.
As for the issue of the yuan's exchange rate, I would like to conclude by saying that as long as our country's real economy foundation is strong, it will exert a tremendous attraction to foreign capital, and will not lead to a large-scale withdrawal of foreign capital due to the appreciation of the US dollar. Even if the US dollar continues to raise interest rates, it will not affect the core value of the yuan.