On the evening of August 29th, the Chinese Yuan exchange rate suddenly surged!

Offshore Yuan breaks through 7.1

On August 29th, the offshore Yuan against the US dollar once broke through 7.09, rising by more than 400 points within the day.

The onshore Yuan exchange rate broke through the 7.1 threshold, rising by nearly 300 basis points within the day.

In terms of news, on August 29, 2024, the People's Bank of China conducted an open market business bond buyout transaction through a quantity bidding method, purchasing 400 billion yuan of special treasury bonds from primary dealers in open market operations.

In addition, according to the official microblog of the central bank, on August 26th, Pan Gongsheng, Secretary of the Party Committee and Governor of the People's Bank of China, presided over a symposium with representatives and committee members of the two sessions, experts and scholars, and financial enterprise leaders to analyze and study the current economic and financial situation, and listen to relevant opinions and suggestions. Xuan Changneng, a member of the Party Committee and Deputy Governor of the People's Bank of China, and the person in charge of the State Administration of Foreign Exchange attended the meeting.

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Zhang Bin, Tian Xuan, Peng Wensheng, Lu Ting, Chen Dongsheng, Yang Yucheng, Wang Changqing, Lu Huayu, and others spoke respectively. Everyone unanimously believed that since the beginning of this year, macro policy efforts have been further strengthened, a series of policies and measures to expand domestic demand, stabilize expectations, and prevent risks have been introduced one after another, the economic operation has continued to rise and improve, and China's economic fundamentals are robust. The representatives at the meeting also made suggestions on how to stimulate effective demand, especially consumer demand, stabilize expectations and strengthen confidence, promote the stable and healthy development of the real estate market, and maintain the health of financial institutions.

Pan Gongsheng said that everyone has put forward very good opinions and suggestions. Since the beginning of this year, the People's Bank of China has resolutely implemented the decisions and deployments of the Party Central Committee and the State Council, and the prudent monetary policy has been flexible, moderate, accurate, and effective. It has implemented three major monetary policy adjustments in February, May, and July, providing strong support for the economic recovery.

In the next stage, the People's Bank of China will deeply implement the spirit of the third plenary session of the 20th Central Committee of the Party, implement the requirements of the Central Political Bureau meeting on "macro policy to continue to exert force and be more powerful," continue to adhere to a supportive monetary policy stance, strengthen counter-cyclical adjustments, use a variety of monetary policy tools comprehensively, and increase financial support for the real economy.

At the same time, research and reserve incremental policy measures, enhance the coordination and cooperation of macro policies, and support the consolidation and enhancement of the economic recovery and improvement trend. Will the Federal Reserve's interest rate cut lead to a 10% surge in the Yuan as trillions of dollars flow back?Previously, Stephen Jen, the renowned proponent of the "Dollar Smile Theory," analyzed that a U.S. interest rate cut could trigger a repatriation of Chinese capital to the tune of $1 trillion, propelling the appreciation of the Chinese yuan by 10%.

The theory goes as follows: According to Stephen Jen's analysis, since the pandemic, Chinese companies may have accumulated over $2 trillion in offshore investments, with these funds parked in investments yielding higher returns than assets denominated in Chinese yuan.

When the Federal Reserve lowers borrowing costs, the allure of dollar-denominated assets diminishes, potentially prompting a "conservative estimate" of $1 trillion in capital to flow back to China, as the interest rate gap between China and the U.S. narrows.

Jen forecasts that if U.S. inflation continues to cool, the Federal Reserve will cut interest rates more aggressively than the market expects. This expectation, coupled with the overvaluation of the dollar, America's twin deficits, and the prospect of a soft landing, all reinforce his conviction that the dollar will depreciate.

Nevertheless, Jen stated that the People's Bank of China might mitigate sharp fluctuations, as these could weaken the competitiveness of exports.

Regarding the rapid appreciation of the yuan, Guan Tao, the Global Chief Economist at Bank of China Securities, recently told the media that due to the impact of international market volatility and other factors, there is a possibility for the yuan to appreciate rapidly and significantly due to exporters' settlement of foreign exchange and the unwinding of carry trade positions.

On one hand, Chinese companies hold a considerable amount of foreign exchange positions, and the carry trade positions that had shorted the yuan were quite crowded. Although the willingness of exporters to settle foreign exchange has somewhat eased, the expectation of yuan depreciation has not fundamentally changed. On the other hand, once one-sided expectations fluctuate, it could trigger a significant and rapid appreciation trend.