Renminbi (RMB) trends and toolkits - Deloitte
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Renminbi (RMB) trends and toolkits
As of this writing, the Chinese yuan (CNY) impossible to predict, and these are not noted the growing role the yuan would
was essentially trading at 7 to the US the best of conditions. Still, there is value in likely play in international settlement.
dollar (USD), a sharp decline in exchange reviewing both events potentially impacting He also remarked on three areas where
value since the end of February, when it the yuan and the toolkit at the disposal of significant improvement was expected in
traded in the 6.3 range. Partly the result China’s leaders to respond to them. China’s external-facing management of
of USD strength against most currencies, the currency, what generally is described
it does reflect a sharper decoupling from Events as the “international role of the RMB.” The
the relatively close tracking to the USD In October 2016, the International Monetary first was meeting high standards of data
that has been maintained over the past Fund (IMF) added the Chinese yuan to its transparency, working with institutions,
several years.1 Of course, the concerning special drawing rights basket. The decision such as the IMF and Bank of International
data on China’s economic stresses recognized China’s continued reform Settlement, reporting things like currency
has contributed. Still, futures markets success and major significance as an composition of reserves and major
in tradeable yuan continue to reflect exporting nation. That was the first inclusion banking statistics. The second was that the
confidence in China’s currency.2 of a new currency since 1999 when the euro currency be “freely useable,” widely used for
replaced the French franc. international settlement, and widely traded
Under the best of conditions and in the
In the edition of the IMF News announcing in the principal exchange markets. The
most stable times, currency trends are
the formal inclusion, an IMF director third was the development of major, well-
1Renminbi (RMB) trends and toolkits
regulated capital markets; relative openness the yuan will hold its value in the 6.8–6.9 US tightening monetary policy even as
of the capital account; and stable institutions range but not appreciate and regain the China’s response to its economic stresses
governed by reliable rule of law.3 levels seen earlier in 2014 or early 2018.8 is a modest loosening of monetary policy.
All high and low points in the yuan’s US
As we approach the six-year anniversary The exchange value of the yuan has become
dollar value since mid-2014 occurred in the
of that decision, progress on these issues more consequential for multinational
USD:CNY range of 6.0560 to 7.1484.
remains debatable, especially with respect companies with significant China
to openness of the capital account and engagement, especially as they undertake Given all that has happened in that
level of yuan trading in principal exchange resetting their China operations in a broader time frame, the movements have been
markets. Nonetheless, the IMF announced global context. Analyzing yuan value trends somewhat modest—a maximum decline
that the weighting of the yuan would be becomes important when potentially of 15% from the 2014 peak and 10% since
increased on August 1, 2022, to 12.28%, liquidating some China assets or expanding 2016, counting from well before the trade
from the 10.92% level it has occupied others. The same could be said of regulatory frictions and all the other externalities
since 2016.4 practices constraining capital account discussed.10 In comparison, the euro’s US
transfers on the Chinese side or tightened dollar value declined more than 28% from
The impact of CNY-related events US listing and outbound investment the mid-2014 peaks to the present value,
We are revisiting our previous discussions restrictions from the US side. now hovering around parity with little sign
of the Chinese yuan for several reasons. of near-term recovery.11
First, although less than a 1.5% increase in Recent events have reshaped the
total basket weighting, the IMF move does yuan’s behavior and trajectory. Shortly There is a balance of countervailing
represent an increase in yuan weighting of after the yuan’s formal inclusion in the pressures that is shaping the future value
12.5%. And increased yuan weighting was special drawing rights (SDR), the new of the yuan. Supporting its value is China’s
not the only change. The US dollar weighting US administration began its broad tariff current large export surplus, which among
was also increased, whereas the euro, yen, and sanctions program, followed by the many things provisions its foreign currency
and GBP saw their weighting decreased.5 economic impact of Mainland regulatory reserves. Top leadership has consistently
The increase in the US dollar weighting was changes, then the pandemic and committed to not only protecting but
a tad less than 4%. The IMF is essentially lockdowns, the apparent end of China’s expanding China’s role in global supply
projecting its expectations for the relative impactful property market appreciation chains. The depth of China’s foreign
importance of these currencies in the future and consequent developer defaults, and exchange (forex) holdings enables it to meet
global financial system. finally the Ukraine situation, bringing foreign currency needs, including overseas
global commodity inflation and disruptive acquisitions and imports (especially energy
Not all indicators align with what we financial sanctions that restricted US dollar and minerals), and importantly to defend the
interpret to be the IMF’s view. For example, transactions. There are indications inflation currency in the limited exchanges where its
anticipation for appreciation or stability is now higher than nominal investment international form, the CNH, is traded.
of the yuan figures prominently in the returns, and infrastructure projects, even
risk premiums associated with portfolio The importance of China’s forex holdings in
those underway, are becoming more difficult
investment in Mainland equities and debt. supporting the currency, especially against
to finance.9
After years of soaring growth in booming the kind of attacks that triggered the Asian
Chinese capital markets, from 2018 to 2020, Volatility or stability: Trend markers Financial Crisis in July 1997, makes forex
venture capital funds from the United States What are some relevant signs that could trends a critical measure. In spite of China’s
into China dropped from $20 billion to help CFOs, treasury executives, and other sustained record-trade surpluses, foreign
$2.5 billion. The number of deals dropped financial managers build useful scenarios? exchange reserves fell in August by 1.58%,
from 306 in 2019 to 247 in 2020.6 More First, how volatile has the yuan been? or nearly USD50 billion. Domestic reports
recent analyses, based on interviews with attributed that to the complexity of the
The yuan reached peak US dollar exchange external environment.12 It certainly reflects
much larger and previously very optimistic
values since the trade frictions in spring capital outflows at elevated levels.
asset management groups, indicate a
2018 and February 2022, and low values
moderation of interest. Explanations vary, Among critical externalities, low interest
the fourth quarter of 2018, fourth quarter
from geopolitical pressures driving financial rates in the United States and European
of 2019, and spring 2020. The current
market fragmentation to a strong push in Union were key in the calculations that
trend down now coincides with news of
China for a larger party and SOE role in all drew major asset management wealth
a broad economic slowdown in China. At
activities of industry and commerce.7 As to China, but the impact of related yield
the same time, pressure on both capital
noted earlier, offshore yuan futures markets factors likely has flipped with the US
accounts and yuan value results from the
on contracts one year out reflect confidence Federal Reserve’s recent historic rate
2Renminbi (RMB) trends and toolkits
hikes as well as the established safe-haven Potential runs on local banks, widespread 2021. Central budget deficits have been
reputation of the US dollar. mortgage defaults, and private developer rising by 2 trillion yuan a year and have hit
defaults are issues impacting the a crescendo in the first quarter of 2022,
On the negative side is the aggravation of
perceived stability of the yuan and inviting evidencing the impact of cash infusions via
numerous economic stresses and growing
strong government action. The National the tax system.16
concern at home and abroad in the
Bureau of Statistics of China’s headline for
sustainability of China’s growth rate. China’s How does this work? As VAT payment
its most recent report was “production
brief economic recovery, celebrated as receipts are passed along supply chains, for
and supply continued to recover,
proof of effective management of the COVID both goods and services, the final receipt
employment and prices were generally
impact, has appeared to have faded, and holder has typically paid 4.5% to 6.8% VAT
stable, foreign trade maintained the
indeed the COVID lockdowns that are the to the local tax administration. The receipts
good momentum of growth, and people’s
hallmark of China’s pandemic management it receives can, within a specified period of
livelihood was strongly and effectively
are being blamed by many. The Q2 2022 time, be redeemed from the local financial
safeguarded. The national economy
GDP declined 2.6% from Q1, against a more bureaus for the 9% official national VAT rate.
sustained the momentum of recovery.”14
modest expected decline of 1.5%.13
The point is that the VAT rebate system
China’s governance structure enables the
The government response is measured and provides directable channels to inject
top leadership to react very quickly with
includes more direct stimulus in the form of cash into agents, including small and
adjustments to monetary policy, subsidies
infrastructure investment, easing of banking medium enterprises, at local levels. Local
and stimulation, and tax practices. But
reserve rules, easing of rules governing tax authorities compete in the chase for
the structure through which rules are
local bonds and other local fundraising investment and business activity generally
implemented engenders a lot of diversity at
measures, and easing of tax burdens. Even with the actual VAT collection rates. VAT
the local level if not potential misdirection
as the debt crisis remains a priority, these rebates provide a bankable margin for
and diluted impact.
steps are resulting in a significant decrease businesses that collect and convert VAT
in government tax revenue that could Many of the ways central cash flows into receipts. Local business registration
potentially ease the burden of growing local economies, shaped by the monetary requirements are such that there are
deficits from central government direct toolkit, may be among the most unfamiliar companies with a constellation of local
spending and support of local governments. “Chinese characteristics” for multinational branches whose primary revenue is
There is the continued growth of debt at company (MNC) executives. A prime collecting and processing VAT rebates,
the local government and SOE levels as well example is the National Development and shopping local tax authorities, and
as central government levels. And finally Reform Commission (NDRC), Ministry of harvesting maximum income between the
there is the massive impact of the turbulent Finance (MoF), and State Administration actual amount paid and the greater value of
property sector, which appears to be of Tax (SAT) use of value-added tax (VAT) the tax receipt for rebates.17
reducing household consumption, triggering regulation to measure, time, and direct cash
The use of tax policy to support local
a mortgage revolt, and forcing many local flows in the economy at local levels outside
resource needs is very granular. In just
banks to lock consumer accounts as lines of infrastructure investment. The relationship
two months alone—from the beginning
anxious account holders form daily at their between policy goals and currency
of May to the end of June 2022—the SAT,
doors. Local governments are searching stabilization is clear.
NDRC, and MoF made some two dozen
for a means to alleviate the many social
Perhaps unique to China and a good adjustments, reductions, clarifications, and
and economic impacts of the residential
example of this point, the VAT system of declarations about taxes, primarily VAT.
property slowdown.
payments, receipts, credits, and rebates is a
major mechanism for channeling cash into Things to watch
Actions and reactions: The toolkit
the economy and maintaining adequate Developing reliable scenarios for the future
China has publicly acknowledged
yuan supply. A major reduction in VAT tax of China’s currency is not an easy exercise,
current economic challenges, and top
rates was implemented in April 2019, as given the multiple contingencies, both
leaders have consistently assured the
part of a 2 trillion yuan tax reduction effort domestic and international.
domestic and international public that
adequate monetary tools remain in to stimulate the economy.15 With lockdowns Domestically, it is easy to underestimate the
their kits to manage the challenges. The and other disruptions amplifying economic tools that are available to leaders to manage
explicit priority is to maintain domestic stress, in H1 2022 tax deferrals and rebates potentially disruptive outcomes for the
confidence in the economy and the doubled over the previous year’s level, currency, given the focus of top leadership
currency and avoid a prolonged downturn reaching 3 trillion yuan, or about 2.5% of on economic stability, the speed with which
that could erode international confidence. China’s 114 trillion yuan GDP reported in adjustments can be implemented, and the
3Renminbi (RMB) trends and toolkits
numerous and responsive touchpoints into to reduce that dependency, China has role globally, especially as the EU joins in
industry and commerce China’s economic explicitly and contrarily committed itself and other economies around the world
and political system provides. Similarly, it to increasing its global supply chain role plan and invest to become competitors
is easy to underestimate the role China and thus maintaining export surpluses themselves in key manufacturing areas
may have in high-value exports in the and strong forex positions. Energy policy such as semiconductor fabrication. The
years ahead that would provide buoyant and broader industrial planning, as well as competition concept could constrain
forex reserves to back up the yuan under capital controls and banking procedures, the potential for China to become self-
continued administrative control. As of the are integrated toward the goal of sufficient in key technologies and also
end of August 2022, China reports forex maintaining a positive trade balance, for Chinese enterprises to become
holdings of USD3.055 trillion, hanging maintaining substantial forex holdings, genuinely competitive globally, both key
above the long-hallowed USD3 trillion and funding ambitious international components of the long-term growth
benchmark.18 Having said that, it is equally programs and acquisitions. plan. Recent implementation rules for the
easy to underestimate the tectonic impact of Creating Healthy Incentives to Produce
In the background but remaining
the property market reset on the economy Semiconductors (CHIPS) and Science Act
important for the future of the yuan,
at large, individual family wealth, and the announced by the Biden administration
especially as an international currency,
currency. The mortgage burden alone in include choking off any investment from
is what progress China will make on the
2021 was 40 trillion yuan.19 beneficiaries of the legislation in high-
three expectations laid out by the IMF
tech manufacturing on the Mainland for
Internationally, China appears to have when the yuan was first included in the
10 years.20 For planning and investment
avoided significant trade and currency SDR basket. The events and responses
decisions, analyzing the potential success
repercussions from the Ukraine situation. reviewed in this discussion generally
of Chinese companies abroad and other
And not withstanding lockdown impacts would not strengthen those expectations.
exogenous strengths of and challenges to
on industrial production, exports have
The outcomes of what has been called the yuan is no less important—and may
held up well and rebounded vigorously
“strategic competition” by US negotiators prove to be more important—than the
from relatively brief dips. Even as many
may be among the most consequential for current global media focus on domestic
MNCs that have long depended on China
China’s long-term currency stability and economic stresses.
for core supply chain roles take steps
4Endnotes
1. Bloomberg, USD-CNY currency rate, accessed September 2022.
2. CME Group, Standard-size USD/Offshore RMB (CNH) futures – quotes, accessed September 2022.
3. International Monetary Fund (IMF), “IMF adds Chinese Renminbi to Special Drawing Rights basket,” September 30, 2016.
4. Nikkei Asia, “IMF lifts Chinese yuan’s weighting in basket of top currencies,” May 15, 2022.
5. Ibid.
6. Thilo Hanemann et al., “Two-way street – US-China investment trends – 2021 update,” Rhodium Group, May 19, 2021.
7. Chris Anstey, “Why China’s ties to the global economy are fraying,” Bloomberg, July 23, 2022.
8. CME Group, Standard-size USD/Offshore RMB (CNH) futures – quotes, accessed September 2022.
9. Interviews and Deloitte analysis.
10. Wall Street Journal Markets, Chinese yuan, accessed September 2022.
11. European Central Bank, US dollar (USD), accessed September 2022.
12. China News, “The State Administration of Foreign Exchange responds to the reasons for the change in the scale of foreign exchange reserves in
August,” September 7, 2022.
13. Dhwani Mehta, “China’s GDP contracts 2.6% YoY in Q2 2022 vs. -1.5% expected, AUD/USD unfazed,” FXStreet, July 15, 2022.
14. National Bureau of Statistics of China, “National Economy Sustained the Momentum of Recovery in July,” August 15, 2022.
15. Amber Liu, “5 big changes to China’s VAT in 2019,” China Briefing, October 14, 2019.
16. CEIC, “China tax revenue – 1995–2022,” accessed September 2022.
17. National Institute for Finance and Development, “Local and Regional Finance,” May report, 2022; Deloitte analysis.
18. China News, “The State Administration of Foreign Exchange responds to the reasons for the change in the scale of foreign exchange reserves in
August,” September 7, 2022.
19. Wenyi Zhang, “Real estatein China – statistics & facts,” Statista, June 8, 2022.
20. Kinling Lo, “US Chips Act bars American companies in China from building ‘advanced tech’ factories for 10 years,” South China Morning Post,
September 7, 2022.
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