On June 30th, 2016, the CFETS RMB exchange rate index closed at 95.02, losing 2.19 percent from the end of May; the RMB exchange rate indices referenced to the BIS basket and the SDR basket closed at 96.09 and 95.76 respectively, losing 2.39% and losing 0.47% from the end of May. In the context  of post-Brexit global FX market turbulence, although all three RMB indices went through different extent of depreciation, RMB  fluctuated in a much narrower band than other currencies, and remained generally stable against the currency basket. The market expectation has also been rather stable.

There are several reasons for RMB’s depreciation against the currency basket in June. Traditionally, June is distribution period for most listed companies. Corporations and banks have obtained additional dollar funds for distributing dividends to overseas shareholders. Meanwhile, high demand of overseas acquisition domestic corporations helped bring in the rising foreign exchange demands temporarily. Especially, the Brexit referendum on June 24 induced a shockwave to the global FX market, resulting in a higher risk aversion mood. Therefore, changes in market supply and demand plus the sharp rise of global risk aversion derived the RMB/USD to close in the depreciation direction from the RMB/USD central parity. The RMB exchange rate indices depreciated slightly as a result.

From the perspective of RMB/USD bilateral exchange rate, the RMB/USD central parity has been operating orderly in accordance with the “previous closing rate + movements of a basket of currencies” mechanism. On June 30th, the RMB/USD central parity was 6.6312, depreciating 522 bps from the end of May. Amongst the 522 bps, the daily closing rates has accumulated depreciation of 1495 bps from daily central parities, which reflects that the market’s short supply; whereas the central parities have accumulated appreciation of 973 bps from last day’s closing rates, which reflects exchange rate changes of the currency basket. Before the Brexit referendum, weak U.S. non-Farm payrolls data led to dimmed Fed rate-hike expectation, and US dollar depreciated. After the win for "leave" in the referendum, rising risk aversion and rebounding US dollar ensued. Speaking from the whole month, to maintain the RMB exchange rate indices relatively stable requires RMB to appreciate against USD on the central parity level.

In the first half of 2016, the RMB exchange rate depreciated moderately while maintaining an overall stability. On June 30th, the CFETS RMB exchange rate index depreciated 5.86% from the end of 2015; the RMB exchange rate index referenced to the BIS basket and the SDR basket depreciated 5.53% and losing 3.12%. The market force was the main driver of the depreciation. On the one hand, Chinese corporations are still deleveraging with foreign debt, along with stronger will of overseas acquisition. On the other hand, there is still uncertainty regarding the Fed rate-hike. Because of lack of effective supervision, some offshore speculators short Asian currencies (including RMB) with leverage, which also brings depreciation pressure to RMB. Supply of FX is generally lower than the demand in the FX market. Base effect also contributed to the recent depreciation. The base period of CFETS RMB exchange rate index is the end of December 2014, with an index reading of 100. By that time, since the reform of RMB exchange rate formation regime in 2005, RMB central parity has appreciated 35.2% against USD, and RMB REER (real effective exchange rate) calculated by BIS has appreciated 47.6%. RMB exchange rate was at a high level, which might not represent the equilibrium level and thus rendered adjustments reasonable. From a long-term perspective to examine movements of RMB exchange rate indices, such as moving averages based on half-yearly, yearly or data of even longer period, RMB exchange rate would have remarkably improved stability. Furthermore, the domestic price level is another influential factor for the RMB exchange rate depreciation. Current inflation of China is on a level generally higher than the U.S., resulting in depreciation pressure on RMB NEER (nominal effective exchange rate).

In June, the PBOC delivered messages of "firmly pushing forward the market-oriented reform of RMB exchange rate" and "the RMB exchange rate will continue operating orderly in accordance with the current formation mechanism" through Weibo and official statements consecutively. We believe that, within the current formation mechanism which is based on market supply and demand and referenced to a basket of currencies, the RMB/USD bilateral exchange rate will continue to fluctuate bi-directionally with flexibility, and RMB exchange rate against a basket of currencies will remain generally stable.