Breaking through 6.85! How to understand the RMB's strong appreciation?

The Renminbi continued its strength at the beginning of the Year of the Horse, with onshore and offshore prices both breaking above 6.85 on February 26, reaching the highest level since April 2023. This round of RMB appreciation is not only significant in magnitude but also shows strong persistence. The RMB has appreciated for seven consecutive months, the longest streak since 2020. Since the end of 2024, it has appreciated by 6.9%, and this year alone, it has gained 2.1%.

From market performance, this appreciation is characterized by a weak US dollar dominance, increased corporate foreign exchange settlement, and coordinated central bank policies: firstly, a passive appreciation amid the continuous decline of the US dollar index; secondly, exporters concentrated their foreign exchange settlements around year-end and the Spring Festival, releasing accumulated dollar positions and boosting short-term supply; thirdly, the setting of the midpoint rate remains relatively strong, indicating increased tolerance from regulators for gradual RMB appreciation.

As the RMB has strengthened for several consecutive months and shown unexpectedly strong performance beyond seasonal patterns, the market is highly focused on whether this appreciation trend can continue. Although the risk reversal indicator in the options market has risen, with the 1-month USD/Offshore RMB risk reversal reaching 0.43%, indicating some traders are hedging against a potential pullback, the overall trend still favors RMB appreciation.

Limited Impact of Dual Pressures on RMB Appreciation, Support for Internationalization Progress

Although there is widespread concern that RMB appreciation could weaken China’s export competitiveness and hinder economic recovery, this textbook-style worry is not prominent in China. Nominal exchange rate appreciation is not incompatible with strong export growth. Since 2017, RMB strength has often been accompanied by stronger exports and rising price momentum. From 2021 to 2025, RMB has appreciated only 3% against a basket of currencies, while exports increased by 44.8%.

Moreover, China’s shift toward higher-tech and higher value-added export structures reduces exchange rate sensitivity, as these products have lower substitutability. The market consensus expects a 3% nominal effective exchange rate (NEER) appreciation and a 1.5% real effective exchange rate (REER) appreciation this year, which will only slightly dampen real GDP growth by 10 basis points in 2026. Therefore, the actual impact of appreciation on exports and economic growth is very limited.