The Renminbi Exchange Rate - Analysis
By the China Database team
The volume of Renminbi issued has a highly correlated relationship with China’s foreign exchange position. This means that a change in China’s foreign exchange position will affect the Renminbi exchange rate considerably. We have chosen to further discuss the topic of the Renminbi exchange rate by analysing the above data.
As we have mentioned in our previous analyses, “Renminbi money supply is closely related to foreign exchange position whereby US dollars constitutes a main part of it.” Now we would like to make use of the ratio of foreign exchange position to reserve money to further elaborate on our view above.
- The ratio of foreign exchange position to reserve money stood above 100% in 2012.
- The average foreign exchange position to reserve money ratio was around 97% during the period between 2013 and 2014.
- The ratio has dropped to 92% in 2015 and declined further to 71% as of December 2016.
Note: As the foreign exchange position to reserve money ratio keeps plunging, Renminbi exchange rate also depreciates dramatically from 6.1 to 6.9.
These two sets of data reveal that as long as the foreign exchange position continues to decline, the Renminbi exchange rate will keep weakening, and vice versa.
From this analysis, can we say that foreign exchange reserves are very important? Most importantly, China should retain a significant amount of foreign exchange reserves.