Commentary丨Steady Progress in the Internationalization of the Renminbi

　　Since the beginning of this year, the RMB exchange rate formation mechanism has repeatedly stabilized market expectations. This includes May 27th and July 24th, when both onshore and offshore RMB strongly approached the 7.01 mark. In terms of reasons, behind the RMB's strong appreciation in the first half of the year were international market expectations that China's trade surplus indicated an undervaluation of the RMB and that the Sino-US trade negotiations would conclude with RMB appreciation. However, this view is debatable. Firstly, the rationale for the RMB being undervalued is clearly insufficient.

　　As is well known, according to the macroeconomic analysis framework under open conditions, China's external sector trade surplus seems to support the judgment of RMB exchange rate appreciation. However, currently, China's domestic sector price index is relatively low, leading to negative year-on-year growth in the GDP deflator (the ratio of GDP without removing price changes to GDP with price changes removed) for multiple consecutive quarters. To alleviate this negative output gap in economic operation, appropriate flexibility in the RMB exchange rate is evidently the dominant strategy.

　　Secondly, the notion that China and the US would sign an agreement similar to the "Plaza Accord," pressuring RMB appreciation, is mere speculation. Latest news indicates that China and the US have extended the tariff "truce" by 90 days. Sino-US trade negotiations cannot dictate the process of market-oriented reform of the RMB exchange rate.

　　In reality, although exchange rate formation mechanisms are complex, there is a general consensus in international finance that no single exchange rate arrangement is suitable for all periods of a country. For a large economy, based on the阶段性 needs of economic development and realistic internal and external constraints, "maintaining independence" is optimal.

　　Therefore, for the RMB exchange rate formation mechanism, how to dynamically adjust to better meet the needs of China's economic development stages has become a mandatory question. Especially during the current Fed interest rate hike cycle, market entities' financial operations of "asset dollarization + liability localization" based on the China-US interest rate differential have not only created significant pressure on maintaining RMB exchange rate stability but also affected the transmission effectiveness of domestic monetary policy. This once again indicates that there is still room for improvement in the RMB exchange rate formation mechanism.

　　It can be anticipated that, on the basis of introducing more exchange rate hedging tools such as foreign exchange futures and options to meet corporate hedging needs, gradually relaxing fluctuation limits, introducing more non-bank financial institutions to participate in the interbank foreign exchange market, and orderly opening the capital account are all likely directions for the market-oriented reform of the exchange rate formation mechanism.