Summary of Key Points
On August 21st, the RMB appreciated against the USD, breaking through 6.72 for the first time in nearly three and a half years, with an increase of nearly 3.85% this year. Despite the interest rate differential between China and the US being 300 basis points (US interest rates being much higher than those in China), the RMB has continued to strengthen. The main support for this trend comes from the trade surplus and a growing cycle of enterprises converting foreign exchange into RMB. The recent decline in the USD index has further fueled this appreciation. In the medium to long term, the RMB is likely to move upwards moderately, while in the short term, its value will fluctuate with the USD, with stability being the overall trend.
I. Current Situation of RMB Appreciation: Reaching a Three-and-a-Half-Year High, Up by Nearly 4% This Year
On August 21st, the onshore RMB reached 6.7192 against the USD, and the offshore RMB also reached 6.7179, both marking the highest levels in nearly three and a half years. Since the beginning of 2026, the RMB has appreciated by about 3.85% against the USD. It is noteworthy that the current interest rate differential between China and the US is quite large: the yield on 10-year US Treasury bonds is around 4.7%, while in China, it is only 1.68%, a difference of 3 percentage points (300 basis points, where 100 basis points equals 1%). Logically, with higher interest rates in the US, funds should flow there, and the RMB should depreciate. However, the opposite has happened, with the RMB continuing to appreciate for over a year and showing no signs of slowing down.
II. Why is the RMB Appreciating Despite the Large Interest Rate Differential? Two Key Factors Are at Work
Why can the RMB withstand the pressure of the interest rate differential and still appreciate? Dong Zhongyun from AVIC Securities believes that this is mainly due to two long-term factors:
1. **Trade Surplus Provides Adequate “Foreign Exchange Fuel”: China exports more than it imports, resulting in enterprises earning more USD. With a surplus of USD in the market, the RMB naturally becomes more valuable.
2. A Growing Cycle of Converting Foreign Exchange into RMB: Enterprises holding USD do not immediately convert it into RMB. If the RMB's appreciation trend is not confirmed or if US interest rates remain high, they will hold on to the USD. However, once the RMB breaks through key resistance levels, they fear further depreciation and quickly convert the USD into RMB. The more people convert, the more the RMB appreciates; the more the RMB appreciates, the more eager enterprises are to convert, creating a self-reinforcing cycle. Data supports this: from January to July 2026, banks' net foreign exchange sales surplus amounted to 289.4 billion USD, which is more than the total for the entire year of 2025; in 2024, this figure was negative.
III. Recent Acceleration in Appreciation: The Decline in the USD Index Has Been a Catalyst
The RMB has appreciated more rapidly since the end of July, mainly due to the decline in the USD index. Why has the USD index fallen?
- Intervention by Japan and the US in the Yen: The strengthening yen has directly pressured the USD against the yen, leading the market to believe that the US's tolerance for a strong USD has decreased.
- The Fed's Less Hawkish Stance: Recent Fed meetings did not indicate further interest rate hikes, causing USD bulls (those buying USD) to start selling.
- Weak US Economic Data: The August non-farm payroll report (fewer job creations) and low CPI (slow price inflation) have led the market to believe that the Fed will not raise interest rates again, reducing the attractiveness of the USD.
As the USD has weakened, the RMB has strengthened, which is an external factor contributing to the recent acceleration in appreciation.
IV. Future Trend: Moderate Appreciation in the Medium to Long Term, Fluctuations with the USD in the Short Term
Dong Zhongyun predicts that:
- In the Medium to Long Term: The RMB is likely to move upwards moderately. China's exports are expected to remain strong due to global demand for AI and energy transformation, as well as China's comprehensive industrial chain and stable delivery capabilities. The trade surplus will continue to translate into foreign exchange conversions, and the existing USD held by enterprises will also be converted into RMB, enhancing the attractiveness of RMB assets.
- In the Short Term: The RMB will fluctuate with the USD index. If the USD continues to weaken, the RMB will strengthen; if the USD rebounds due to US economic data or increased risk aversion, the RMB may experience a pullback, but this will not reverse the overall appreciation trend, as long as the foundations of exports and foreign exchange conversions remain in place.
V. Expert Advice: Stable Exchange Rates Are Needed to Avoid Extreme Fluctuations
Economist Bai Ming emphasizes that the RMB's trend should be stable. “We need to prevent significant depreciation, but we also need to avoid rapid and large appreciations.” A stable exchange rate is more beneficial for China's economic development, as it allows for better coping with various external challenges.
(Note: The year mentioned in the original text, “2026,” is likely a mistake and should be either 2023 or 2024 based on the context.)