Between January and April 2023, China achieved a trade surplus of 2.02 trillion yuan, a staggering year-on-year increase of 56.7%. However, the Chinese yuan broke through the 7 mark against the US dollar, which is quite puzzling. Isn't China's foreign trade performance this year quite good? So why has the yuan depreciated?

After witnessing the Chinese yuan-to-US dollar exchange rate break through the 7 integer threshold, some people began to worry about China's economic issues, and some even linked it to the so-called "deflation theory." Although the yuan breaking through the "7" integer threshold has a certain symbolic significance, after all, the appreciation of the yuan is a long-term trend, but why has it depreciated at this time?

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China's foreign trade surplus soars by 56.7%

The latest foreign trade data is out, and the trade surplus is unusually high. What is the reason for this?

In the first four months of 2023, China's foreign trade surplus reached 2.02 trillion yuan, expanding by 56.7% compared to last year.

This data is already astonishing, but it's not the most shocking part, especially in April when it jumped to 96.5%, has it surprised you?

In April, China's trade surplus soared to 618.44 billion yuan, a year-on-year increase of 96.5%. Last year, China's trade surplus was already growing from a high base, and now it has reached a new high on the basis of last year's high surplus.

The continuous increase in foreign exchange surplus indicates that China's products are very attractive to other countries in the world. However, the foreign exchange surplus brings too much foreign exchange reserves, which will increase financial risks.

On the one hand, a high trade surplus indicates that China has achieved net profit in foreign trade, promoted national economic growth, expanded employment, and is conducive to improving China's position in the international market.Adequate foreign exchange reserves have become a stabilizer for the healthy development of China's economy, enabling it to enter a fast track of growth.

On the other hand, a long-term high trade surplus may lead to the occurrence of financial risks. The banking crisis in the United States serves as a warning, and the risk of U.S. debt default is also on the rise.

If the U.S. dollar depreciates sharply due to an economic crisis in the United States, China's foreign exchange reserves will suffer losses. The trade surplus also exacerbates China's total energy consumption. China bears the brunt of manufacturing needs, which requires a large amount of energy consumption, causing certain harm to the environment.

At present, China has achieved a huge trade surplus, and the main responsibility still lies with Western countries, as the trade structure is a natural result of international division of labor.

The imbalance in China's trade balance is mainly due to the low savings and high consumption in the United States, as well as export restrictions on high-tech products.

The traditional trade concept of Western countries believes that trade deficit is a bad thing, and this concept has long dominated the trade policies and practices of Western countries.

In fact, a country's foreign trade should pursue a long-term basic balance of imports and exports, rather than a long-term trade deficit or surplus.

At present, many people think that a trade surplus means China has made a profit. In fact, "surplus = profit" is a big misunderstanding. A surplus does not mean that China has gained an advantage, and a deficit does not mean that Western countries have suffered a loss.

For example, if Country A exports goods worth 10 million yuan to Country B, with a profit of only 10%, then the profit obtained from this trade is 1 million yuan. However, if Country B exports goods worth 5 million yuan to Country A, but the product profit is as high as 30%, then the profit from this trade is 1.5 million yuan.

Now, some people are still thinking about decoupling from China, always worrying that China's rise will change their way of life, and worrying that China will force them to do things they are unwilling to do.Facing this peculiar perception that is prevalent across all social strata and the "putting oneself in others' shoes" mentality, the United States would rather be overwhelmed by inflation than exchange high-end technology with China for cheap goods.

Nowadays, most goods are exported abroad, and the payments received are predominantly in US dollars. How should these funds be managed to maximize their value? A portion is exchanged into Renminbi to pay workers' salaries, while the remainder is deposited in banks to earn interest. During periods of US dollar appreciation, interest rates are also high, so after foreign trade settlements, the money is all saved in US dollar accounts.

In theory, a trade surplus should drive the appreciation of the Renminbi, but due to the uncertain domestic economic situation, most foreign traders do not exchange their earnings into Renminbi after settlements, leading to the devaluation of the currency.

The overall trend for China is to reduce its holdings of US Treasury bonds, making it impossible to use a large amount of funds to purchase them.

So, how should such a huge trade surplus be spent?

How to maximize the value of trade surplus?

For China, currently holding a large amount of US dollars, it is imperative to consider how to maximize their value.

The US dollar interest rate hikes have led to a global shortage of US dollar liquidity, causing many countries to face a shortage of US dollars, resulting in the accumulation of imported goods and the devaluation of their own currencies.At this juncture, our country can lend US dollars to nations that are short of them, with repayments made in Renminbi (RMB). This not only promotes the internationalization of the RMB but also prevents the United States from attempting to create a dollar shortage through interest rate hikes to exploit other countries.

Most notably, China's recent efforts to connect with Central Asia have essentially established a land-based Eurasian continental system. While the United States is preoccupied with encircling our nation, we have already linked up all the key nodes of the external circulation's foundational social interconnectivity, thereby bolstering China's core economic circle.

The substantial trade surpluses our country has garnered can also be invested in infrastructure development in these countries. Of course, holding onto US dollars indefinitely is not realistic, as the US debt crisis is a significant uncertainty. The United States has become addicted to issuing debt; who knows if the next crisis will erupt.

Negative news from the US banking industry has also receded from public view recently. The Federal Reserve is unlikely to lower interest rates in the short term, which is why the US dollar index has shown some strength recently, naturally exerting pressure on the RMB exchange rate.

Our country's monetary interest rates are relatively low, which naturally suppresses the attractiveness to capital. Faced with the uncertainty of the next phase of domestic economic recovery, many external funds may choose to cash out their previous paper profits and temporarily withdraw to wait and see.

As is well known, RMB devaluation is beneficial for exports, while RMB appreciation is advantageous for imports. After the RMB appreciates, imported goods naturally become cheaper. Conversely, when the RMB depreciates, foreign currencies become more valuable, allowing them to purchase more Chinese goods, which is beneficial for stimulating exports and generating foreign exchange.Fluctuations in exchange rates often depend on domestic economic conditions to make corresponding choices. If the domestic economy recovers slowly, it is necessary to stimulate exports and improve foreign trade conditions by devaluing the renminbi, thereby increasing the speed of economic growth driven by exports.

If the domestic economy becomes overheated, at this time, it is necessary to stimulate imports by appreciating the renminbi to cool down the economy.

Under the current environment, the renminbi exchange rate is actually fluctuating in both directions, blurring the expectations of global capital, thereby avoiding significant appreciation or depreciation of the renminbi.

At present, the renminbi exchange rate has broken through 7.

From the external environment, the deepening of the U.S. banking crisis and the increased risk of economic recession have led to a decrease in international capital's interest in the U.S. dollar, which in turn flows into renminbi assets, thereby promoting the appreciation of the renminbi. Therefore, the depreciation of the renminbi is only short-term.

From the domestic environment, China's economy is still recovering steadily. Against the backdrop of global trade being generally weak, China can still maintain good performance, and the renminbi exchange rate does not have a basis for continuous depreciation.

Therefore, there is no need to make a fuss about the renminbi exchange rate breaking through 7 against the U.S. dollar. How to guide market expectations, not to make too many subjective interpretations, and to create a stable and positive public opinion environment for China's economic development is the top priority.

Trade creates foreign exchange to buy U.S. debt?

The whole world is de-dollarizing, why is China still increasing its holdings of U.S. debt by 20.5 billion, isn't this helping the U.S. dollar to strengthen? It's really hard to understand, some people say.The game between China and the United States is long-term, but in the short term, the Renminbi cannot achieve the goal of internationalization. Increasing holdings of U.S. debt can not only obtain better investment value but also play a good transitional role.

China's reduction of U.S. debt is a long-term fluctuation process, which has been reducing overall, and there are very few months when it has increased. This increase is also fully considered in its own interests. The internationalization of the Renminbi is not a reduction of U.S. debt at all costs.

China is now replacing the low-interest long-term debt of the past with the high-interest short-term debt after the United States raised interest rates. Under the overall trend of reduction, the long-term debt that matures will not be renewed.

As for helping the U.S. dollar strengthen, it is too imaginative to think that more than 20 billion U.S. dollars can make the U.S. dollar strong.

When a large amount of foreign exchange has nowhere to go, holding U.S. Treasury bonds in the short term is also the best way to preserve value.

This is also beneficial for easing the tense emotions between China and the United States, which will also allow more American allies to see the path of the United States. With this kind of behavior to block China, do you have confidence to follow?

If the economy is not good, how can it be self-sustaining?

In the first quarter of 2023, there are many people on the Internet saying that China's foreign trade is not good, and it is said to be very convincing, with many believers, and those who do not believe cannot find evidence to refute.

In the absence of refutation, everyone has taken the facts for granted.

Many people are ready to live a hard life. Let the foreign trade drop, anyway, the data of foreign countries has dropped more severely. As long as we can survive the foreigners, it will be fine.But to everyone's surprise, the foreign trade, which was expected to decline, actually showed a staggering surplus increase of 96.5%. Against the backdrop of a mere 1% weak global export growth, China's export data achieved a 10% growth rate.

Such impressive data makes one wonder where all the articles came from in the first quarter, claiming that China's foreign trade was not viable.

However, the continuously surging surplus data is indeed astonishing, with growth rates of 50% or even 90% that are simply too alarming. If this surging surplus percentage drops rapidly, some countries would be in a dire situation, or in other words, China could import high-end chips.

Looking at the current international situation, the United States, apart from relying on national power to take down a few companies, has actually had a very limited impact on China. The US is still unable to exert decisive pressure on China, and other countries are even less qualified to have friction with China.

With the continuous enhancement of our country's comprehensive national strength, the renminbi has significantly increased its resilience in the foreign exchange market. The market's maturity and the rationality of market entities are continuously improving, enabling better adaptation to changes in the external environment.

Looking ahead, driven by a favorable economic outlook, central bank policy support, and the internationalization process of the renminbi, it is highly likely that the exchange rate will return to a rational range of two-way fluctuations.