Academy of Social Sciences experts: Don't be afraid! The depreciation of the renminbi is accelerating

Recently, the RMB exchange rate depreciated 3.3% to 6.89 in just 30 working days, exceeding the accumulated depreciation in the past 10 months. The issue of the RMB exchange rate has once again become the focus of media and public attention.
This round of RMB exchange rate is based on the “closing price + basket currency”, a new mechanism for the RMB exchange rate: the US dollar index drives the basket currency to rise, and the RMB needs to depreciate against the US dollar to stabilize the basket currency.
In the face of new changes in the RMB exchange rate, we need to think carefully: Is the new exchange rate formation mechanism an effective and sustainable mechanism, and whether the RMB exchange rate can go out of the depreciation channel in the future, and there is a real two-way floating?

According to the existing middle price pricing formula, the acceleration of the RMB depreciation is completely reasonable.
On August 11, 2015, the People's Bank of China announced the implementation of the reform of the RMB exchange rate formation mechanism. In February 2016, the People's Bank of China disclosed the specific content of the “closing exchange rate + a basket of currency exchange rate changes”: the middle price of the day = the previous day's middle price + [(previous day closing price - the previous day's middle price) + (24 hours currency basket stability) The theoretical middle price - the previous day's middle price)]/2. Another expression equivalent to the above formula is: the middle price of the day = (previous day closing price + 24 hour theoretical central parity of currency basket stability) / 2.
The difference between the closing price of the previous day and the middle price reflects the direction and intensity of the RMB depreciation or appreciation pressure in the foreign exchange market. The inclusion of this item in the mid-price pricing formula reflects the desire of the monetary authorities to release the appreciation or depreciation pressure to achieve market clearing.
What is the theoretical central price of the so-called 24-hour currency basket stability? The central bank gave a basket of currency indices as a reference target: the CFETS (China Foreign Exchange Trading Center) index. Simply put, the CFETS index contains three main components: the RMB against the US dollar, the US dollar index, and other currency indices. The rise in the exchange rate of the RMB against the US dollar and the US dollar index will lead to an increase in the CFETS index. In order to maintain the stability of the index, when the US dollar index rises, the exchange rate of the RMB against the US dollar should fall. On the contrary, it is reversed. The introduction of the basket currency factor in the middle price pricing formula means that the central bank should not only consider domestic factors when determining the exchange rate level, but also consider international factors such as the US dollar index.
Since October, the RMB has continued to depreciate against the US dollar. Recently, the exchange rate of the RMB against the US dollar broke through 6.88, falling to the lowest level in nearly eight years. During the period, the US dollar index rose by 4.5%, while the CFETS index, which measures the volatility of the RMB basket, remained basically stable. What caused the acceleration of the depreciation of the RMB exchange rate? From the internal point of view, although the depreciation pressure of the renminbi has always existed in the foreign exchange market since 2015, the indicators of China's macro economy have improved in the past two months, and there has not been any policy change in China that is sufficient to worsen the expectations of the RMB exchange rate. The external conditions did have some unexpected changes: first the British referendum to Brexit, and Trump was recently elected president of the United States. Trump is committed to increasing infrastructure investment, implementing tax cuts and other policies. The Fed’s rate hike is expected to rise. The US 10-year bond rate has entered 2.0%, and the US dollar index has exceeded 100.
In this situation, in order to maintain the stability of the CFETS index in accordance with the mid-price pricing mechanism of “closing price + change of a basket of currency exchange rates”, the central bank should let the renminbi depreciate against the US dollar. Even if the closing price of the Chinese foreign exchange market depreciation pressure remains the same, unless the central bank no longer follows the "closing price + a basket of currency exchange rate changes" rule, maintaining a 24-hour CFETS index stable RMB against the dollar theoretical exchange rate is enough to force the central bank The central parity of the exchange rate of the RMB against the US dollar will be lowered, not to mention the increase in the return on assets in the United States and the fact that the Fed will raise interest rates, and the pressure on the depreciation of the RMB will certainly increase. According to the existing mid-price pricing formula, the acceleration of the RMB depreciation is entirely reasonable.
It should be emphasized that under the current exchange rate formation system, whether the renminbi is appreciated or depreciated, whether it is a slow depreciation or an accelerated depreciation, it is related to the changes in the central bank's intervention in the foreign exchange market. At present, the reason why the RMB exchange rate against the US dollar broke through 6.88 is because the central bank is willing to continue to follow the pricing mechanism of “closing price + change of a basket of currency exchange rates”. If the central bank does not want to see the exchange rate break through 6.88, it can fully increase its intervention in the foreign exchange market, raise the closing price of the RMB against the US dollar, and stabilize the exchange rate at what it considers to be moderate. The precondition for the central bank to do so is that there is enough foreign exchange reserves to use.

Facing the pressure of RMB depreciation, the central bank’s three options
Needless to say, there is currently a strong pressure on RMB depreciation in the foreign exchange market. Faced with this pressure, the central bank has three options: 1. Stop the intervention in the foreign exchange market and release the depreciation pressure once; 2. Peg the dollar, declare that it will never depreciate, until the relationship between supply and demand changes, the depreciation pressure disappears; In some way, the exchange rate is gradually depreciated until the depreciation pressure disappears.
China tried the second method during the Asian financial crisis and succeeded. However, the prerequisite for the success of this option is the existence of strict capital controls. This is not the case, this condition is currently difficult to meet in China.
The central bank is currently adopting a third method. The problem with this approach is that a gradual depreciation means that the devaluation pressure cannot be released once. In fact, since the central bank officially announced the CFETS index in December 2015, only in February and July 2016, the closing price was lower than the average opening price. In other months, the closing price was higher than the opening price (direct price method, rising represents depreciation), indicating that there is always pressure on the RMB depreciation in the market, and the expectation of RMB exchange rate depreciation has never really disappeared. In October 2016, the closing price averaged a depreciation of 40 basis points per day, reaching the highest value since the “8·11” exchange rate reform.
Since the devaluation pressure cannot be eliminated, the devaluation expectation cannot be eliminated. Moreover, even if the domestic foreign exchange market does not have the pressure of RMB depreciation, if the US dollar index rises, the RMB will depreciate according to the new middle price pricing rules. Therefore, as long as there is an expectation of a rise in the US dollar index, there will be an expectation of RMB depreciation. The imbalance between supply and demand in the forward contract market fully reflects the unilateral depreciation of the RMB in the market, and the expectation of depreciation is also reflected in the volatility of the RMB.

Important shortcomings of the slow depreciation policy
The long-term existence of depreciation expectations will inevitably encourage more capital outflows, thus greatly extending the release process of depreciation pressure. Not only that, in the process of slow depreciation, when a part of the depreciation pressure is released, the new depreciation pressure will appear again, resulting in more loss of foreign exchange reserves. During the ten years from 2005 to 2015, everyone said that they would want to get rid of the "irrational" expectations of the appreciation of the renminbi, and they would not be able to fight it. As a result, the balance of payments imbalance could not be corrected, and the cross-border and inter-temporal resources were The distribution is seriously distorted, and a large amount of hot money flows into China for arbitrage and arbitrage. The appreciation of the renminbi has continued for at least a decade. How long will the devaluation process last? In the long-term slow appreciation process, China has accumulated 4 trillion US dollars in foreign exchange reserves. In the devaluation process that began in 2014, we have used $800 billion in foreign exchange reserves in less than two years. At this rate, if the depreciation process drags on, how much foreign exchange reserves can we use?
The reduction of foreign exchange reserves cannot be simply described as "hiding in the people." In the case of the expected appreciation of the year, the establishment of "CIC" and the increase of the exchange rate of residents are "hidden in the people." However, when the RMB exchange rate is in the depreciation channel, a considerable part (not all) of the already depleted foreign exchange reserves is not “hidden in the people” but capital flight. In fact, a considerable portion of foreign exchange reserves have been transformed into properties in the United States, Canada, the United Kingdom, and Australia, which have turned into profits for domestic and foreign investors and speculators. Refusing to let the renminbi depreciate in place is objectively refusing to increase the cost of capital flight and even encourage capital flight.
Another important flaw in the slow devaluation policy is the weakening of the independence of the central bank's monetary policy. In the monetary policy report for the second quarter of 2016, the central bank pointed out: "If frequent RRR cuts will provide a large amount of liquidity, prompting the market interest rate to go down..., the pressure on the depreciation of the local currency will increase, and the foreign exchange reserves will fall. The more liquidity released by the RRR More, the stronger the expectation of the depreciation of the local currency, the more it will encourage speculators to take the money to buy foreign exchange speculation, thus forming a cycle." This shows that even with the new exchange rate formation mechanism, the fear of devaluation still seriously affects the independence of monetary policy. Moreover, the recent rapid depreciation of the RMB exchange rate has not differentiated expectations, but has strengthened the expectation of depreciation to a certain extent. This consistency is expected to be a serious constraint on the central bank's monetary policy.

Under the control of capital, the depreciation of the renminbi is not as terrible as many people think.
In order to reduce foreign exchange losses and maintain monetary policy independence as much as possible, the central bank has greatly strengthened capital controls while guiding the gradual depreciation of the renminbi. Strengthening capital controls is completely correct. In the current situation, capital controls must be strengthened and not weakened. However, there are different ways of capital regulation. For example, the exchange rate limit is a direct regulation, and the Tobin tax is an indirect regulation. More indirect ways should be used to minimize price distortions caused by capital controls.
It should be emphasized that although it is necessary to strengthen capital controls, the side effects of capital controls are enormous. For example, we found that although the macro-prudential policy implemented by the monetary authorities has cracked down on speculators who use arbitrage in forward-sales contracts, it has also caused the entire long-term market to languish, and the contracting volume is far lower than the “8.11” exchange rate reform. Previously, the risk of corporate hedging was objectively increased. The depreciation of the renminbi (not expected) is itself an important means of curbing capital outflows and flight. The depreciation of the renminbi will reduce the pressure on capital controls.
The depreciation of the renminbi is not as terrible as many people think. According to the international literature, the currency has depreciated sharply. If the depreciation is more than 25%, there will be four problems: inflation; bank balance sheet currency mismatch; sovereign debt crisis; corporate external debt crisis. Only the fourth question in our country is more prominent. In the past, in the context of the expected appreciation of the renminbi, Chinese companies have borrowed large-scale external debt. Once the renminbi depreciates, the debt of the company's renminbi may rise sharply. However, in the past year, the external debt of Chinese companies has been greatly reduced, and it should not be unbearably impacted by the large depreciation of the renminbi.
The most common saying at the moment is that once the devaluation will shake confidence, the renminbi will not know where to go. What is the basis for this statement? When has this happened in the history of the world economy: As the world’s largest trade surplus country, the economic growth rate is much higher than the global average growth rate, the world’s largest foreign exchange reserves, and the financial assets yields higher than the United States. The national currency will depreciate by 20% to 25%! The fundamentals of the Chinese economy do not support the sharp depreciation of the people. Even if the exchange rate temporarily overshoots, it will eventually return to the level determined by fundamentals. What's more, China still has the last line of defense in capital control. There is no need to worry too much about the short-term, volatile devaluation.
An important feature of the Chinese economy is that the broad money-to-GDP ratio is too high. Many people are worried that once the renminbi is devalued and a large amount of renminbi is exchanged for US dollars, the renminbi will go to the end. The broad ratio of broad money to GDP is indeed worth worrying about. This is an important argument against the early opening of capital projects, but it cannot be used against opposition to stop intervening in the foreign exchange market (of course not absolutely without intervention). In the absence of capital controls, there is a lot of capital outflows. Even if you adopt a fixed exchange rate system, how much foreign exchange reserves do you have to stabilize the exchange rate? The problem here is the timing of capital project liberalization rather than the choice of exchange rate regime. The cessation of intervention we advocate is based on the premise of retaining capital controls. Exchange rate fluctuations should be placed before capital account liberalization. This has a consensus in academia, and there is no need to repeat it here. Indeed, in the case of retaining capital controls, the exchange rate decision is not a real market exchange rate, but China's exchange rate marketization process must undergo such a transitional phase. In the case of retaining capital controls, letting the RMB exchange rate be determined by the market will not lead to a waning situation of the RMB exchange rate, but it can alleviate the pressure of capital controls, thereby reducing the distortion of capital controls on market prices and resource allocation.
In short, although the exchange rate formation mechanism of “closing price + basket currency” has better realized the policy of guiding the gradual depreciation of the renminbi, it has made the market unable to clear out for a long time and cannot achieve real two-way fluctuation of the exchange rate. The cost is a large loss of foreign exchange reserves, the independence of monetary policy is affected, and the market distortion caused by capital controls is strengthened.
In the coming period, there may be an increase in the US dollar index caused by rising dollar asset yields, as well as capital outflows, increased exodus, or greater depreciation pressure on the renminbi. The period from now until the Trump administration took office is a window to abandon the intervention in the foreign exchange market and let the renminbi depreciate. I hope that the central bank can follow the "8·11" exchange rate reform and complete the reform of China's exchange rate system as soon as possible on the basis of a good plan.
(Yu Yongding is a member of the Chinese Academy of Social Sciences, Xiao Lijun is an associate researcher at the Institute of World Economics and Politics, Chinese Academy of Social Sciences)

1. Chemical Composition:sodium methylene bis-naphthalene sulfonate
Appearance: beige brown powder
Solubility: soluble in water of any hardness
PH value:  in 1% water solution, PH = 7-9
Performance: good diffusion and protective colloid, and no penetration and foaming .
Ion: anionic.
Stability:  resistance to acid, alkaline, hard water, salt.

Affinity:  have an affinity for protein and polyamide fibers, for cotton, hemp and other fibers no affinity.

Miscibility: may mix with anionic and non-ionizing surfactant simultaneously.

2. Specifications indicators

Items	Indicators
Type	First Grade	Qualified
Appearance	Beige brown powder	Beige brown powder
Dispersancy (Standard substance)	≥100%	≥95%
PH Value (1% water solution)	7-9	7-9
Sodium sulfate content	≤3%	≤5%
Fineness (residuals of 60 mesh/screen)	≤5%	≤5%
Calcium and magnesium ions, Ppm≤	1000	4000
Impurities (non soluble in water)	0.05%	0.10%

 

3. Application
Printing and dyeing industry: mainly used for dyeing vat dyes suspension, leuco acid staining, dispersion and soluble vat dyes dyeing. Also be used for silk / wool interwoven fabric dyeing, the yarn is no color. Mainly used for industrial dye dispersion and diffusion of color lakes manufacturing additives.
Building materials industry: as early strength cement water reducing agent, the amount of 0.5-1% by cement after the shock has good dispersion effect, increasing the strength of cement. Diffused N of concrete tensile strength, impermeability, frost and compressive modulus of elasticity are improved, no corrosion of steel effect.
Pesticide industry: It can be widely used in wettable pesticides, with good dispersion and solubilization, can significantly improve the efficacy, dosage according to product requirements. Example: buprofezin, the amount of 3-5 %; thiophanate amount of 0.8-1.5 %, 0.8-1 % Kai Ling vegetables.
Electroplating industry: the color is added, crossing pigment dispersants N allows uniform dispersion can significantly improve the plating surface brightness, and the amount is usually 10% of the pigment.
Rubber industry: rubber (latex) of industrial production process, the dispersed substances such as sulfur accelerator, antioxidant zinc oxide fillers ( such as barium sulfate , calcium carbonate ), etc., added to the dry weight of a Dispersing Agent N2-4% , 10% Dispersant solution prepared in advance , and along with the other components in a ball mill grinding , can improve the dispersion effect and shorten the milling time .
Packing: 25kg bags.
Storage: two years and must be upload and download lightly. 

Dispersant N

Dispersant N,Dispersant,Dispersing Agent Nno,Dispersing Agent

Shandong Tiancheng Chemical Co., Ltd. , https://www.akdchemical.nl