Summary of Key Points
This year, the RMB has appreciated moderately against the USD, reaching a nearly three-and-a-half-year high of 6.7179 in August before entering a period of high-level volatility. The appreciation of the RMB has had two main impacts: firstly, it has reversed the exchange rate gains and losses for companies (many companies that made gains from currency conversions last year have now incurred losses this year); secondly, it has increased the difficulty for small and medium-sized foreign trade enterprises to hedge their risks. Additionally, the trade surplus in foreign exchange transactions narrowed significantly in July, but experts believe this is a temporary adjustment, as the supply and demand in the foreign exchange market remain balanced. In the future, the RMB is unlikely to experience a rapid, one-way appreciation and is likely to fluctuate within a range of 6.6-7.0.
I. Why is the RMB Appreciating? The Main Reason is the "Concentrated Release" of Foreign Exchange Demand
The most direct factor supporting the appreciation of the RMB this year is the increased demand from companies to convert USD into RMB. Over the past few years (2023-2025), many export companies have held between $500 billion and $800 billion in USD without converting it into RMB, hoping that the USD would appreciate or that interest rates would remain high. However, this year, the appreciation of the RMB has exceeded the interest rate differential compared to the USD, prompting companies to quickly convert their USD into RMB to avoid further losses. For example, in June, which is the end of the half-year, listed companies needed to release their financial reports and there was a concentrated demand for foreign exchange conversion, resulting in a surplus of $56.6 billion. Although the surplus narrowed to $18.3 billion in July, the cumulative surplus for the first seven months already exceeded the total for the entire last year, indicating that the supply of foreign exchange remains ample.
II. The Contradictory Effects of RMB Appreciation on Companies
The appreciation of the RMB has had a stark impact on companies' exchange rate positions:
- Listed Companies: Chery Automobile earned $3.398 billion in exchange rate gains last year but lost $2.092 billion this year, a difference of $5.4 billion, which significantly reduced its profits; Hikvision earned $600 million last year but lost $595 million this year, with financial expenses increasing by 146%.
- Small and Medium-Sized Export Enterprises: These companies already have thin profits (some rely on export tax rebates and even need subsidies to survive), and even a 1-2% change in the exchange rate can wipe out their profits. For instance, selling goods worth $1 million may result in a $200,000 loss in earnings if the RMB exchange rate rises from 6.9 to 6.7, which can be critical for these marginally profitable businesses.
III. The Challenges Faced by Small and Medium-Sized Foreign Trade Enterprises in Hedging
To avoid exchange rate fluctuations, companies can use hedging strategies (such as forward foreign exchange contracts), but the actual implementation is difficult:
- High Costs: The current spot exchange rate is 6.72, while the three-month forward rate is only 6.67-6.78. Locking in the exchange rate means earning less (for example, converting at 6.67 results in a $0.05 per USD less profit), which companies find difficult to accept psychologically.
- High Risk-Taking: Some companies hope that the USD will rebound and choose not to hedge, betting on a potential gain, only to end up incurring losses.
- Lack of Capability: Small and micro enterprises do not have the knowledge or additional funds to pay for hedging services and can only passively bear the losses. State-owned and large companies also face concerns; management fears that locking in the exchange rate could lead to internal criticism if the rate changes later, so they are hesitant to actively hedge.
IV. The Narrowing Trade Surplus is Not a Turning Point, but a Temporary Adjustment
The trade surplus in foreign exchange transactions decreased from $56.6 billion in June to $18.3 billion in July, leading some to worry about changes in the supply and demand market. Experts, however, argue that this is a normal phenomenon:
- The high surplus in June was due to companies concentrating their foreign exchange conversions at the end of the half-year (for financial reporting) and seasonal factors; the decrease in July is a natural result of this concentrated release, not a reversal in supply and demand.
- The cumulative surplus for the first seven months, at $289.4 billion, has already exceeded the total for last year ($196.6 billion), indicating that the supply of foreign exchange still exceeds demand, providing support for the RMB.
V. The RMB is Not Likely to Appreciate Drastically in the Future; It Will Likely Fluctuate Within 6.6-7.0
Experts predict that the RMB will not experience a rapid, one-way appreciation in the second half of the year for three main reasons:
1. Supporting Factors: The trade surplus remains high ($112.5 billion in July), and although the demand for foreign exchange conversion has slowed, it still exists; the USD may weaken (the US may cut interest rates, reducing the yield on US bonds).
2. Restraint Factors: In the third quarter, Chinese companies overseas will need to purchase foreign exchange to distribute dividends (about $40 billion), which will offset some of the demand for foreign exchange conversion; the central bank emphasizes maintaining a stable exchange rate and will not allow the RMB to appreciate too quickly.
3. Expected Range: Most institutions expect the RMB to fluctuate within the range of 6.6-7.0 in the second half of the year, with both upward and downward movements, rather than a continuous rise or fall.
Conclusion
The appreciation of the RMB has put pressure on companies, but the overall foreign exchange market remains stable, and the future trend is expected to be relatively mild. For companies, it is crucial to move away from the mentality of betting on exchange rate movements and establish a normalized risk-hedging mechanism. For regulators, it is important to help small and medium-sized enterprises reduce the costs of hedging and make it easier and more feasible for them to use these tools. For individuals, there is no need to worry too much about exchange rate fluctuations; as long as the amount of foreign exchange conversion is not large, the impact on daily life will be minimal.