The Renminbi reached a record high against the US dollar.

On June 21, the Renminbi reached a record high against the US dollar.

After the market opened that day, the People's Bank of China set the USD/CNY central parity rate at 6.8275, consistent with the previous Friday. However, during subsequent trading, market expectations for Renminbi appreciation strengthened. By 5:30 pm, the USD/CNY exchange rate was 6.7968, a 0.45% increase from the central parity rate. This was the largest single-day increase since China's 2005 currency revaluation (within the 0.5% trading band set by the central bank), and 6.7968 marked the highest level for the Renminbi in 30 years.

The market's reaction stemmed from an announcement issued by the People's Bank of China on June 19. The announcement stated that, based on domestic and international economic and financial conditions and China's balance of payments, the People's Bank of China decided to further advance the reform of the Renminbi exchange rate mechanism and enhance the flexibility of the Renminbi exchange rate.

This also reversed the agenda of the upcoming G20 Leaders' Summit in Toronto this weekend—China has begun taking measures to balance the global economy; now it's the developed countries' turn.

China is most confident in global recovery.

Expectations of Renminbi appreciation drove a significant surge in global stock and commodity markets on June 21.

Asian stock markets, which opened first, rose sharply. The MSCI Asia Pacific Index closed up 2.5% that day, its largest increase in nearly two weeks. European and US markets, which opened later, continued their upward trend for several consecutive days.

The Shanghai Composite Index rose 73 points, or 2.9%, while the Hong Kong Hang Seng Index closed up 3.1%. Morgan Stanley upgraded its rating on Chinese bank stocks from "in line with the market" to "outperform".

Simon Johnson, former chief economist of the IMF, believes that Renminbi appreciation will attract massive speculative capital inflows into China.

AMP Capital, an Australian fund manager overseeing over US$90 billion in assets, stated that they might buy more Renminbi-denominated equity assets. This fund, with a US$200 million QFII quota, also said they might buy more commodity stocks, as Renminbi appreciation would boost China's demand for raw materials.

International crude oil prices rose to over US$78 per barrel that day, up over 3%. Three-month copper futures in London rose nearly 5%. Gold prices also hit a new high, reaching US$1265 per ounce.

In a research report, Goldman Sachs economists Qiao Hong and Song Yu stated that the policy adjustment indicates that the Chinese government is more confident in global economic recovery and is more proactive in addressing protectionist sentiments and adjusting global demand.

This vote of confidence in the global economy from China increased global investors' appetite for risk assets. US Treasury bonds, German government bonds, and credit default swap markets all fell on Monday.

Cliff Waldman, an economist at MAPI, said that China's allowing the Renminbi to appreciate indicates that China is less concerned about the threat of the European crisis compared to a few months ago.

The future trend of the Renminbi

However, due to the uncertain European outlook, a more flexible Renminbi means it could move in two directions in the future.

From July 2005, the Renminbi appreciated by approximately 20% against the US dollar within two years. However, by the summer of 2008, as the international financial crisis worsened, the Renminbi returned to a pegged exchange rate against the US dollar, remaining around 6.83.

Li Daokui, a member of the Monetary Policy Committee of the People's Bank of China, stated that the central bank's statement marks the end of the temporary fixed exchange rate policy adopted due to the financial crisis, and also signifies the potential end of endless speculation on Renminbi appreciation.

He said that the Renminbi may form a two-way fluctuation mechanism in the future, potentially appreciating or depreciating against major currencies. Future trends will depend on the performance of the euro and other major currencies.

Li Daokui said that if the euro stabilizes against the US dollar, the Renminbi may resume a gradual and slow appreciation, with an appreciation of approximately 2%-3% this year. If the euro depreciates significantly against the US dollar, or the US dollar appreciates significantly against other currencies, the Renminbi may depreciate against the US dollar, referencing a series of major currencies.

Donald Straszheim, former Merrill Lynch global chief economist and senior managing director of ISI Group, agrees with this view. He believes that China's move this time is more about managing the Renminbi against other currencies, especially the Renminbi against the euro, rather than the Renminbi against the US dollar. "The value of the Renminbi exchange rate will continue to be determined by Beijing, not the market."

The euro has fallen by about 14% against the Renminbi this year, severely threatening China's exports to the EU. Ma Jun, an economist at Deutsche Bank, said that because the Renminbi has already appreciated significantly against the euro, the appreciation of the Renminbi against the US dollar will be limited in the next six months.

Dozens of economists surveyed by Bloomberg and Reuters believe that the Renminbi will appreciate by an average of 1.9% against the US dollar to 6.7 by the end of the year. On June 21, the offshore Renminbi non-deliverable forward (NDF) rose 1.4% to 6.62, indicating that the overseas market expects a 2.7% appreciation of the Renminbi within one year.

G20 awaits action from developed countries

Eswar Prasad, a Brookings Institution fellow and former head of China research at the IMF, said that whether this adjustment is a symbolic gesture or represents a real shift that will lead to a significant appreciation of the Renminbi remains to be seen.

However, Prasad said that this move shows that Chinese officials recognize that a more flexible Renminbi exchange rate is in China's own interest and fulfills China's commitment to international responsibility. He said that China effectively shifted the debate before the G20 meeting, and it can now emphasize that G20 leaders should focus on the main factors of global imbalances, especially the debt problems of developed countries.

Several US congressmen last week said that if China did not take action on the Renminbi exchange rate before the summit ended, the US Congress would legislate punitive tariffs on Chinese exports. China responded in kind, with Foreign Ministry spokesman Qin Gang saying last week that discussing the Renminbi exchange rate at the G20 was "inappropriate."

"I think the (People's Bank of China) announcement was a bit preemptive, and it may have removed the exchange rate issue from the G20 agenda," said Nicholas Lardy, a researcher at the Peterson Institute for International Economics.

Stephen Roach, chairman of Morgan Stanley Asia, said that Beijing has made a greater commitment to global balance than Washington and other governments, and that the US and Europe need to take concrete action to address their large debt deficits.

But Roach said that China's measures are not a panacea for balancing the global economy, and China needs to take further measures to stimulate domestic private consumption.