In July，the Political Bureau of the CPC Central Committee held a meeting to discuss the US Dollar to Renminbi exchange rate (hereinafter referred to as the RMB exchange rate). This was the first time in two years that such a high-level discussion had taken place on this issue，sending a strong signal to the markets. In addition，positive statements from the meeting on reinvigorating the capital market and optimizing real estate policies were expected to boost market confidence to some extent，thereby supporting the RMB exchange rate. With the meeting serving as a catalyst，capital expected to gradually flow into China’s stock and bond markets，and a weaker US dollar index，we believe that the turning point for the sustained depreciation of the RMB against the US dollar has emerged. With the easing of internal and external factors，the RMB is expected to appreciate against the US dollar in the short term. Nonetheless，the extent of the RMB’s subsequent appreciation may depend on the extent of China’s economic recovery.

The Political Bureau Meeting Sends Strong Signals on the RMB Exchange Rate

The meeting’s emphasis on the RMB exchange rate issue sends a strong signal for managing expectations on the RMB exchange rate. On July 24，2023，the Political Bureau of the CPC Central Committee stressed the need to “maintain the basic stability of the RMB exchange rate at a reasonable and balanced level”. The Political Bureau discussed the RMB exchange rate issue after a two-year hiatus，most recently in July 2021，sending a strong signal to markets. A review of the macro environment at that time reveals that the RMB’s growing strength since June 2020 was due to a combination of factors that include rapid domestic economic recovery，buoyant foreign trade and the continuous inflow of foreign capital. These factors resulted in the RMB exchange rate surpassing 6.4 on May 12，2021. Amid accelerated RMB appreciation，China’s regulatory authorities made frequent statements on managing expectations and raised the foreign exchange deposit reserve ratio by two percentage points to 7% on May 31，2021. Recently，the RMB exchange rate has experienced a continuous pullback to around 7.27 due to factors including a rebound in the value of the US dollar and sluggish growth in the Chinese economy since mid-April of this year. In response to the weakness in the RMB exchange rate，the People’s Bank of China (PBOC) has applied some policy tools，including delivering policy speeches and raising the macro-prudential adjustment parameter for cross-border financing to 1.5. The focus on the exchange rate by the Political Bureau meeting this year may lead to further strengthening of the RMB.

Previously，any changes to the macro-prudential adjustment parameter for cross-border financing often required coordination with other policies to better impact the RMB exchange rate. According to the Notice of the People’s Bank of China on the Implementation of Macro-Prudential Management of Cross-Border Financing on a Nationwide Basis issued in April 2016，enterprises and financial institutions are required to calculate the balance of cross-border financing with a risk-weighted method (referring to the already drawn but unpaid balance). And the risk weighted balance may not exceed an upper limit. The upper limit of the risk-weighted balance of cross-border financing is calculated as capital or net assets multiplied by the cross-border financing leverage ratio multiplied by the macro-prudential adjustment parameter. With this calculation method in mind，the PBOC and the State Administration of Foreign Exchange (SAFE) announced on July 20 that the macro-prudential adjustment parameter for cross-border financing of enterprises and financial institutions would be raised from 1.25 to 1.5. This is expected to increase the cross-border financing quota for domestic entities and may contribute to cross-border capital inflows，increased US dollar liquidity in the domestic market and thus reduced pressures on RMB depreciation. Moreover，adjusting the macro-prudential adjustment parameter also sends a signal to markets in relation to exchange rate expectations. Given the market's past track record，modifying the macro-prudential adjustment parameter for cross-border financing often carries a greater weight in perception than in actual results. It often requires coordination with other policies to have a better impact on the RMB exchange rate. The details are as follows.