Summary of Key Points
Since mid-June, the RMB has experienced a temporary pullback due to the Federal Reserve's more hawkish policies than expected. However, its resilience is notable (when the USD appreciated by 3% at the beginning of the year, the RMB actually strengthened by 2.7%). The decline in the exchange rate for foreign exchange purchases is caused by seasonal factors such as Hong Kong stock dividends; the actual volume of foreign exchange transactions has not significantly decreased. This year, the RMB's performance will show quarter-to-quarter variations: there may be depreciation pressure in the third quarter due to a peak in dividend-related foreign exchange purchases, but companies' low-cost foreign exchange holdings will help offset this. In the fourth quarter, if the RMB appreciates too quickly, the central bank might intervene, with two-way fluctuations being the main trend.
1. The Main Reason for the RMB's Pullback: The Fed's Sudden Hawkish Stance
The recent rise in the RMB from around 6.7 to 6.8 is primarily due to the Fed's hawkish signals exceeding market expectations.
- What did the Fed do? After the June meeting, officials projected higher interest rates for 2026 (from 3.4% to 3.8%) compared to March. On the 25th, U.S. PCE inflation data (a core measure of prices) rose by 4.1% year-on-year, the first time it has exceeded 4% in three years, with core PCE also reaching its highest level since October 2023. This indicates that inflationary pressures in the U.S. remain, making it unlikely for the Fed to cut interest rates in the short term; the probability of a rate hike in September is nearly 60%.
- How does this affect the RMB? The Fed's hawkish stance has made the USD more valuable (the USD index rose from 100.4 to 101.5), causing the RMB to depreciate relative to the USD. Essentially, the USD has become a "strong currency," and as people seek it, the price of the RMB in terms of USD has increased (for example, what used to be 6.7 RMB for 1 USD is now 6.8 RMB).
2. Don't Worry About the Decline in the Exchange Rate: It's a Seasonal Fluctuation
The exchange rate for foreign exchange purchases dropped from 68% in the first quarter to around 50% in April and May, leading some to worry about weakened export momentum. However, this is temporary:
- Why the decline? April and May are peak periods for Hong Kong stock dividends (Chinese companies listed in Hong Kong need to pay dividends in USD), so companies have a temporary decrease in their desire to exchange earned USD for RMB. Additionally, export transactions have a lag (USD is exchanged for RMB 30-90 days after the goods are shipped). Despite exports reaching record highs in April and May, this money will gradually be converted into RMB later on, supporting the RMB.
- The actual situation? A lower exchange rate does not mean fewer foreign exchange transactions. For example, if you earn 100 USD, previously it would have been exchanged for 68 RMB, but now it's only 50 RMB, yet you've earned more USD (due to increased exports), so the actual amount of RMB obtained might be higher. Since June, trading volume of USD against RMB has remained stable, indicating that the market is not panicking.
3. Why Is the RMB So Resilient? Strong Export and Economic Factors
Despite the USD index rising by 3% at the beginning of the year, the RMB strengthened by 2.7%. Its resilience comes from two main factors:
- Outports Surpassing Expectations: The global AI boom has boosted exports of related Chinese products (such as chips and electronic devices), with significant growth in export volumes.
- Stable External Environment: The U.S. and Iran reached a memorandum of understanding, and maritime traffic through the Strait of Hormuz has resumed, minimizing the impact on China's economy. These factors have increased the amount of USD earned by Chinese companies, supporting the RMB.
4. Yearly Trend: Quarter-to-Quarter Variations
This year, the RMB will not show a consistent trend; instead, there will be clear quarter-to-quarter differences:
- Third Quarter: There may be a slight decline. June to August is a peak period for dividend-related foreign exchange purchases and profit repatriation by foreign companies, increasing the demand for USD and putting pressure on the RMB. However, the decline is likely to be limited because companies hold approximately 793.5 billion USD in foreign exchange, with most of it bought at exchange rates between 7.0 and 7.2 RMB per USD. If the USD/RMB rate rises to 6.9-7.0, companies will quickly convert their USD back into RMB to hedge against depreciation.
- Fourth Quarter: Watch out for rapid appreciation. If the RMB appreciates too quickly, the central bank might intervene (e.g., using foreign exchange reserves) to prevent a one-sided trend.
5. Clarifying Misconceptions
Some believe that a Fed rate hike necessarily makes the USD stronger and ends the RMB's appreciation, but experts disagree:
- The USD Is Not Guaranteed to Strengthen: Since July 2025, both the RMB and USD have been strong, and Trump's policies have also contributed to keeping the USD under pressure.
- The RMB Remains Supported: Although China's economic recovery has faced challenges, it is still in its early stages, with exports continuing to grow. Therefore, the RMB will not continue to depreciate due to Fed rate hikes; its long-term strength is still intact.
In summary, the recent pullback in the RMB is temporary, and two-way fluctuations are expected throughout the year. There's no need for excessive concern—should the RMB appreciate too much, the central bank will intervene; if it depreciates significantly, companies will buy USD to stabilize the market. For individuals not involved in foreign exchange transactions, exchange rate fluctuations are generally not a major concern. If you need to convert RMB into USD (e.g., for studying or traveling), it might be more advantageous to do so in the third quarter based on seasonal patterns.