Yesterday, the Chinese yuan experienced a sudden and significant devaluation, breaking through the 6.82 level.

This marks the lowest point in the past month, with the yuan hovering in the 6.7 range for a while, but unable to break upward, ultimately leading to this sharp decline.

Last Friday, the yuan also plummeted by 657 points within a single trading day, and this sharp drop also occurred on a Friday, both happening before the holiday season, which is likely due to the impact of sudden bearish news from the US dollar.

01, Sudden Bearish News

From mid-last year until November, the Federal Reserve raised interest rates by a substantial amount four times in a row, each time by 75 basis points. However, the recent two rate hikes have shown a clear decline, dropping to 50 basis points and then to 25 basis points.

Unexpectedly, due to the US unemployment rate reaching a multi-year low, the Federal Reserve officials have simultaneously released frightening bearish news to the market.

The former chairman of the Federal Reserve Bank of New York warned that, given the current tightness in the job market, the US is almost impossible to achieve a soft landing, and an economic recession is inevitable. The 3.4% unemployment rate is the lowest record in 53 years, coupled with the highest inflation rate in 40 years, which fully indicates that an economic recession in the US is inevitable.

Advertisement

Previously, Powell also indicated that further interest rate hikes are needed, otherwise it would be difficult to bring inflation back to the target range.

Now, some Federal Reserve officials even believe that the terminal interest rate level may be higher than expected, potentially reaching 6%, and remaining at a high level for some time. What is certain is that throughout 2023, the market will not see any rate cuts from the Federal Reserve.

After the continuous bearish news of interest rate hikes, the global financial market has felt the chill.The U.S. stock market has experienced a continuous decline, most notably in the NASDAQ index, which reached a high of 12,269 points at the beginning of February and fell to a low of 11,630 points before closing in the early morning today, a drop of over 7% in just a few days.

The yield on U.S. Treasuries has shown signs of rebounding, which implies that the prices of U.S. bonds may face a significant drop in the next wave.

02, Renminbi Depreciation

Under these circumstances, it is almost inevitable for the renminbi to depreciate.

This is, of course, greatly related to the possibility of the U.S. continuing to raise interest rates, but a larger reason stems from the fact that the renminbi has already appreciated significantly in the past period and now requires a slight adjustment.

At the beginning of last November, the offshore exchange rate of the renminbi against the U.S. dollar even approached 7.40, but it then embarked on a series of strong rebounds. Over the past three months, the renminbi exchange rate has seen a significant increase.

However, after entering February, although the renminbi reached a high of 6.70 at one point, it has now broken through the 6.30 mark, with a cumulative decline of 650 points for the month.

Although the decline is not small, compared to the increase in the previous three months, the issue is not significant.

03, Concerns?

Some investors are concerned about this.The first reason is the continuous interest rate hikes by the Federal Reserve mentioned earlier, which will lead to an ever-widening interest rate differential between the Chinese yuan and the US dollar, increasing the depreciation pressure on the yuan. However, it is important to note that over the past three months, the interest rate differential has also been expanding, yet the yuan has experienced a strong rebound, which clearly indicates that the interest rate differential is not the fundamental cause.

The second reason is that in the recent week, there has been a noticeable selling trend among Northbound capital, which refers to foreign investment. The chart above shows the net buying situation of Northbound capital this year, with red indicating net buying and green indicating net selling. Entering 2023, there was only one net selling transaction on the first trading day, followed by continuous net buying. However, when the yuan fell by 650 points on last Friday, Northbound capital suddenly switched to net selling, amounting to 4.25 billion yuan. The following trading days continued to see net selling. Although there was net buying on this Thursday, it turned to net selling again on Friday. This is significantly different from the consecutive net buying over the previous month, seemingly indicating a shift in foreign investment.

However, we need to consider a longer time frame. Although five out of the last six trading days were in a selling state, the net buying on Thursday alone almost covered the selling of the other five days. If we look at an even longer time frame, the net buying amount for January alone this year exceeded 140 billion yuan. This fully demonstrates that foreign capital is not selling off, but rather making appropriate adjustments and waiting for opportunities to buy on a larger scale.In fact, everyone can rest assured that for global capital, China is no longer an option but a must-have, and more capital will be invested in Chinese assets in the future.