The fluctuations of the Renminbi (RMB) exchange rate have become a focal point of interest in both domestic and international economic arenasThis heightened scrutiny is especially pertinent in light of the rapidly evolving global economic landscape in recent years, where uncertainties abound and the dynamics become increasingly intricate.

Since late October, there has been a notable decline in the RMB exchange rate, prompting questions about the underlying reasons for this downward trend.

On December 3rd, the offshore RMB rate breached key psychological levels of 7.29, 7.30, and 7.31, while the onshore rate also fell to 7.2996. If we trace back to October, the offshore rate has plunged by more than 3,000 points, with a single-day drop of over 300 points recorded on December 3rd aloneThis episode of currency adjustment has undeniably sparked significant market attention and widespread discussion.

Data from December 3rd

The question remains: what sparked a decline of over 300 points in the RMB exchange rate on December 3rd? When we examine the current onshore and offshore prices, it becomes evident that the exchange rate is at its lowest point in nearly 13 months

The offshore price has reached a new low for the year, while the onshore rate is the lowest since November of the previous year.

What has caused the sudden depreciation of the RMB against the US dollar? The answer to this question can be simplified into two main points.

Firstly, the RMB is not weak per se; rather, the US dollar is exceptionally strong.

The dollar index has been rising steadily, peaking above 107 points and currently stabilizing around 106, showcasing its strengthThe robust position of the dollar has consequently led to its appreciation against most major currencies, with many other currencies trending downward.

Therefore, the recent adjustment in the RMB should not be interpreted as an inherent weakness of the RMB assets; it is largely a consequence of the stronger dollar resulting in the relative depreciation of the RMB.

Secondly, tariff policies have played a significant role.

The discussion surrounding tariffs extends beyond China, with proposals to impose additional tariffs ranging from 10% to 20% on global trade partners

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Recent threats of imposing specific tariffs on certain nations aim at China, where a staggering 60% increase has been hinted atAlthough these tariff policies have yet to be fully implemented, the uncertainty they inspire has already shook the global market.

Should such tariffs be enforced, the impact on China’s exports would be monumental – an issue that cannot be overlookedTo mitigate the adverse effects likely from the export climate, a potential policy option could involve a strategic depreciation of the RMB to cushion the blow on exports, which appears to be a measured approach currently in consideration.

If the tariff threats lead to significant impacts on China’s foreign trade, the overall value of the RMB would inevitably feel the repercussionsTo summarize, the primary reasons behind the RMB's decline since October are rooted in these two significant factors.

The pressing question now is, how far will the RMB continue to drop? This inquiry is considerably complex and merits analysis based on certain fundamental principles and trends.

It is essential to emphasize that the RMB's fundamental trend adheres to normal fluctuations within a reasonable range

Although the central bank has not officially delineated this range, there exists a broadly accepted reference pointFor instance, should the RMB fall below 7.35 or 7.4, it could clearly signify a breach of this normal range.

Presently, the RMB remains within the broader interval, and should its exchange rate dip beneath the lower limit of this range, interventions by the central bank to stabilize the currency may be anticipatedNotably, we believe that, despite whatever tariff policies materialize, China's economic performance will ultimately dictate the trajectory of the RMB's exchange rate.

In essence, the performance of China's economy is pivotal in determining the value of RMB assetsThis includes not only the exchange rate but also reflects upon the Chinese stock market, real estate prices, and so forth

The ultimate direction of these assets, alongside external pressures, is significantly influenced by the domestic economic conditions.

Thus, it remains crucial to closely monitor key economic indicators in China, such as growth rates, inflation, and employment statisticsShould China maintain steady economic growth, the RMB might stabilize or even appreciate; conversely, signs of economic downturn or increased volatility could very well expose the RMB to depreciation pressures.

Fluctuations in the RMB exchange rate embody a complex market phenomenon driven by a multitude of influencing factorsConsequently, it is insufficient to rely on one or two variables to forecast the RMB's trajectory; a multi-faceted analysis encompassing various contributing elements is essential.

Therefore, we can make at least one reasonable assertion: the RMB is unlikely to experience a sharp and unilateral decline as some fear, and it will probably not plummet below the 8 mark, which would represent a substantial drop