Since the beginning of this year, the RMB exchange rate has basically stayed near RMB 6.2 to 1 dollar and has slightly appreciated. The situation is roughly the same as I predicted at the end of December 2014. But big changes in three aspects will put the RMB exchange rate at the risk of depreciation in the second half of the year.

First is China's A-Share market rout and the government's support of the market. This reflects the serious lag of financial market reform as well as the lag of the marketization reform of the RMB exchange rate. Therefore, China's stock market turmoil will greatly affect the market process of China's financial market and China's financial marketization reform. This will not only cause the adjustment of the whole financial market development strategy but will also cause the adjustment of some existing specific financial policies by the Chinese government. And it will certainly affect the stability of the RMB exchange rate and the adjustment of the existing exchange-rate policy by China's central bank. If so, exchange-rate policy will be gradually adjusted in the second half of the year.

Second is the high probability of interest-rate hikes by the US Federal Reserve in the second half of the year; basically, this tendency will not change. Recently, Spillover Report, an IMF annual assessment on global financial risk, points out the possibility of the US interest-rate increase in the second half of the year. The US interest rate increase will certainly run counter to the monetary policies of the other major central banks. Meanwhile, it will bring a serious spillover effect to the other countries. Both the developed and newly emerging countries will suffer. In response, China's government is adjusting its policies to prepare for the possible situation in the second half of the year. Among the policies to be adjusted, the change of the RMB exchange-rate policy could be the focus.

Opinions on Promoting the Steady Growth of Imports and Exports released by the General Office of the State Council on July 24 points out that RMB exchange rate should basically remain stable at a reasonable and balanced level. A market-oriented exchange rate mechanism should be perfected and the rate-floating range should be expanded. The settlement of cross-border trade in RMB should be further facilitated and increased.

The measures in response to the changing RMB exchange-rate policies include a further expansion of the RMB floating range. Recently, China's central bank has been expanding the floating range. In March, 2013, the bank expanded the range from 1% to 2%. If the RMB exchange-rate floating range is further expanded from the current 2% to 3% or even 5%, it will be more flexible. When the US dollar is in a period of appreciation, the expansion of the RMB floating range also means a moderate release of depreciation pressure of a much stronger RMB against other non-dollar currencies, thus China avoids the predicament of an effective exchange-rate appreciation caused by a lack of exchange rate flexibility and can boost its export.

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