"At one point in 2023, the renminbi fell below 7 against the US dollar, meaning that one US dollar could be exchanged for more than 7 yuan. This change resulted in the country's GDP (Gross Domestic Product) in 2023 falling to $17.7 trillion when converted to US dollars, down from $18 trillion in 2022. Again, GDP per capita in US dollars is affected. However, from the perspective of the RMB local currency, the official GDP figures released for 2023 are growing.
As of 16 February 2024, the exchange rate of 1 USD to RMB is still hovering around 7.19 In international import and export trade, overseas investment and business travel, and foreign currency exchange, the US dollar is usually used as the benchmark denominated transaction currency, so its exchange rate movements have far-reaching impacts on the economies of various countries.
Looking back at the history of the RMB/USD exchange rate from 1998 to 2023, we can observe the ups and downs and fluctuations during the period, and how these fluctuations have affected our country's and the global economic landscape. The exchange rate is not only an economic indicator, but also a bridge between domestic and international markets, and its stability and predictability are crucial to the healthy development of the economy.
Since its issuance in 1948, the RMB has long been regarded as a non-convertible currency, and its exchange rate is mainly determined by the People's Bank of China. The evolution of the RMB exchange rate can be broadly categorised into two phases: pre-reform and opening-up period and post-reform and opening-up period.
In the pre-reform and opening-up period, the RMB exchange rate went through several key stages. From 1949 to 1952, when the national economy was in the recovery stage, the RMB was subject to a managed float system. Subsequently, from 1955 to 1971, based on the Bretton Woods system, the RMB exchange rate remained stable, at the level of 2.46 yuan (to US$1) for nearly 16 years. And between 1973 and 1979, the RMB exchange rate was adjusted only a few times. By 1978, the median exchange rate of RMB against the US dollar was set at RMB 1.68 (to US$1). During this period, due to the limited degree of opening up to the outside world, foreign trade in imported and exported commodities was relatively small, and the foreign exchange reserves in 1978 were only US$167 million. Before the reform and opening up, currency exchange was strictly controlled and the exchange rate was mainly determined by the central bank.
With the advancement of reform and opening up, the RMB exchange rate system has gradually moved towards marketisation, which also marks the accelerated pace of China's economic integration into the global economy.
Since the reform and opening up, China has vigorously developed foreign trade exchanges. The RMB exchange rate has gone through the stage of dual-track system of listed price and transfer price, the stage of flexible pegged-to-dollar system after the exchange rate was merged, and the stage of dual-track system of exchange rate from 1979 to 1994. This was one of the periods of the greatest depreciation of the RMB, from 1.555 yuan (to the US dollar) in 1979 to 8.619 yuan in 1994, a depreciation of up to 4.5 times. During the period of the two-track exchange rate system, there existed ostensibly equivalent foreign exchange certificates. The huge spread between the actual foreign exchange rate and the official listed price gave rise to a kind of black market trading in foreign exchange that was banned by the government. Initially, speculation in foreign exchange certificates was the mainstay, but later direct speculation in foreign currencies. This distorted exchange rate mechanism had a negative impact on the Chinese economy and hindered normal international trade and economic flows.
In order to rectify this irrational phenomenon, the Chinese Government has gradually promoted market-oriented reforms, including the abolition of the black market in foreign exchange, the implementation of a single exchange rate system, the strengthening of macroeconomic control and other measures. These initiatives have effectively promoted economic stability and development and laid a solid foundation for China's economic development.
At the beginning of the reform and opening-up period, the official pricing of the RMB was considered to be too high. During the 1980s, the official exchange rate fluctuated within the range of 1.49-3.76 RMB to US$1, but prices on the foreign exchange black market were much higher than the official rate, with the difference nearly doubling at the peak in the early period. With the substantial devaluation of the RMB by the official authorities, the black market price of foreign exchange gradually fell back and approached the official listed price. After entering the 1990s, the black market price of foreign exchange turned to be lower than the official listed price, while the foreign exchange coupons also gradually faded out of the market.
In 1995, the official exchange rate was 8.61 RMB to 1 USD. From 1994 until the reform of the exchange rate system in 2005, the RMB remained above 8.27 to the US dollar. Despite the depreciation of the RMB in the 1990s, import and export trade was frequent, and GDP per capita and foreign exchange reserves began to increase significantly.In 2001, China's accession to the WTO (World Trade Organisation) further boosted the development of foreign trade.
On 21 July 2005, China reformed its exchange rate system. After the reform, the RMB gradually entered an appreciation phase against the US dollar and other currencies. Before the reform, the median price of RMB against the US dollar was fixed at RMB 8.2765 per US dollar, but it rose to RMB 8.11 on the next day after the reform, and RMB 8.0702 on the last trading day of that year, representing an appreciation of 2.56%. In the following years, the exchange rate remained at more than 7 to the dollar, appreciating to 6.94 to the dollar in 2008. Despite the depreciation pressures that the 2008 global financial crisis put on the currencies of the major emerging economies, the RMB stood alone, appreciating across the board against the U.S. dollar and other currencies. By 20 November 2013, the median price against the US dollar had risen to 6.13 yuan compared to the pre-reform period, representing a cumulative appreciation of more than one-third, or 35 per cent. in 2014, the annual average exchange rate of the yuan reached its highest point, at 6.14 yuan to the US dollar.
At the same time, China's GDP per capita has experienced remarkable changes. With the advancement of reform and opening up and rapid economic growth, China's per capita GDP has risen year after year. This growth trend and the evolution of the RMB exchange rate are interrelated, reflecting the overall strength of China's economy and the improvement of its international status.
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From 2008 to 2022, the exchange rate of the RMB against the US dollar remained at 6, while in 2023, the exchange rate of the RMB against the US dollar broke "7", and despite the growth of the local currency, China's total GDP and per capita GDP in US dollars both declined. In fact, it is the result of a combination of factors. Among them, the United States interest rate hikes and inflation is undoubtedly an important influence. As the US dollar is the world's major reserve currency and settlement currency, its interest rate hike policy has led to a rise in the US dollar index, which in turn has created depreciation pressure on other non-US dollar currencies, including the RMB. In addition, factors such as the uneven recovery of the domestic economy, the gradual fall in some economic indicators and the rapid change in market sentiment also exacerbated the volatility of the RMB exchange rate.
However, the short-term volatility of the RMB exchange rate does not imply a fundamental change in its long-term trend. In fact, over a longer timeframe, the trend of the RMB exchange rate is still influenced by a variety of factors, including domestic and international economic fundamentals, trade conditions, and monetary policy. Therefore, for the RMB exchange rate trend in 2024, we need to comprehensively consider the changes in these factors.
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In terms of domestic factors, the sustained growth of China's economy, the optimisation of its trade structure and the soundness of its monetary policy will all support the RMB exchange rate. At the same time, with the opening of the domestic financial market and the process of RMB internationalisation, the exchange rate formation mechanism of RMB will also become more market-oriented and flexible.
From the perspective of international factors, the global economic recovery, the monetary policy orientation of major economies, geopolitical risks and other factors may have an impact on the RMB exchange rate. In particular, the trend of interest rate hikes and inflation in the United States will have a direct bearing on the trend of the US dollar exchange rate, which in turn will have an impact on the RMB exchange rate.
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Summing up the above factors, we can think that the trend of RMB exchange rate in 2024 may still face some uncertainty. However, overall, with the improvement of the domestic and international economic environment and the progress of RMB internationalisation, the RMB exchange rate is expected to remain stable and show a certain appreciation trend. Of course, this also requires us to pay close attention to the global economic situation and changes in the policy trends of major economies, so as to respond to possible risks and challenges in a timely manner.
Finally, it should be emphasised that although short-term fluctuations in the RMB exchange rate may have a certain impact on domestic foreign trade enterprises and investors, in the long run, the trend of the RMB exchange rate is still affected by a combination of factors. Therefore, enterprises and investors should maintain a rational attitude and formulate reasonable exchange rate risk management strategies according to their own risk tolerance and investment objectives. At the same time, the government should also strengthen policy coordination and market expectation guidance to maintain the stability and healthy development of the exchange rate market."
