---
title: "How will the central bank respond to the wave of currency exchange and appreciation?"
type: "News"
locale: "en"
url: "https://longbridge.com/en/news/275776342.md"
description: "The appreciation of the Renminbi has triggered a wave of currency settlement, prompting the central bank to take measures in response. The central bank maintains a \"two-way floating\" policy to avoid unilateral appreciation and depreciation. Despite the increased pressure for currency settlement, it is currently mainly in the phase of commercial banks settling on behalf of clients and has not yet entered the central bank's balancing phase. The central bank prefers to use liquidity management tools and macro-prudential measures to adjust settlement pressure rather than directly intervening in the exchange rate"
datetime: "2026-02-12T15:11:18.000Z"
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  - [en](https://longbridge.com/en/news/275776342.md)
  - [zh-HK](https://longbridge.com/zh-HK/news/275776342.md)
---

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# How will the central bank respond to the wave of currency exchange and appreciation?

**Core Views**

❖ RMB Exchange Rate Appreciation: What is the Central Bank's Attitude and Toolbox? By the end of 2025, under market pressure, the RMB exchange rate may "break 7". Although the previously accumulated settlement pressure may trigger a positive cycle of "exchange rate appreciation → higher settlement volume", the central bank has clearly stated that it neither seeks to gain a competitive advantage through depreciation nor wants to prevent unilateral appreciation trends and herd effects. Maintaining "two-way floating" remains the policy tone.

❖ Reviewing the experiences of 2020-2021, the central bank has a rich toolbox including expected guidance, counter-cyclical adjustment factors, forward foreign exchange risk reserve requirements, foreign exchange deposit reserve requirements, and macro-prudential parameters for cross-border financing, with precise and restrained operations sufficient to cope with unilateral overheating. The issuance of central bank bills in September and December 2025 is more of a tactical move to respond to the phase of dollar strength or guide enterprises in settlement, rather than deliberately guiding appreciation.

❖ What stage is the current settlement at? Although the trade surplus brings significant settlement pressure, the current settlement mainly remains at the first stage of "commercial banks settling on behalf of clients" and has not yet entered the second stage of "central bank balancing" to release base currency. Data shows that by December 2025, banks' net settlement reached a new high, but the central bank's foreign exchange holdings did not increase and instead decreased, while M0 and M1 remained high. This indicates that funds are accumulating within the commercial banking system, which not only have not been converted into base currency through the central bank's balance sheet expansion but have also increased the statutory reserve requirement due to the conversion of foreign exchange deposits into RMB deposits, effectively consuming excess reserves and posing challenges to the stability of bank liabilities.

❖ How will the central bank respond to the settlement wave? Since 2017, the balance of foreign exchange holdings has remained within a narrow range, reflecting more of the active settlement and sale of foreign exchange by commercial banks with the central bank, indicating that the central bank has downplayed the practice of directly regulating the exchange rate through foreign exchange holdings. This is to avoid being labeled as a "currency manipulator" and to maintain the independence of monetary policy, preventing passive interference in domestic liquidity from exchange rate stability. In the face of current pressures on bank liabilities and settlement trends, the central bank is more inclined to use active liquidity management tools such as MLF, MDS, and government bond transactions, as well as macro-prudential measures like counter-cyclical factors and foreign exchange deposit reserve ratios to adjust settlement pressure, rather than passively expanding the balance sheet to acquire foreign exchange.

❖ Bond Market Strategy Under the Background of Exchange Rate Appreciation: Historically, exchange rate appreciation is often accompanied by rising interest rates, but in a non-unilateral market, domestic policy and fundamentals are the main drivers. Taking 2021 as an example, despite the strong appreciation of the RMB, the central bank maintained an accommodative stance due to pressures from the transition of old and new growth drivers, resulting in a bull market in interest rates. Currently, although the central bank has not yet provided banks with settlement, which may increase funding friction costs, as long as domestic fundamental pressures persist, the central bank is likely to maintain a supportive attitude. Exchange rate appreciation does not constitute an absolute logic for bearishness in the bond market; interest rates are still "dominated by us", maintaining favorable low levels.

**The main text is as follows:**

By the end of 2025, driven by market forces, the RMB to USD exchange rate may "break 7", mainly due to the easing of Sino-US economic and trade relations since May 2025, the weakening of the dollar index, and the appreciation of the RMB against the dollar. Looking ahead, China has a super-large-scale market and a complete industrial chain, with technological innovation and industrial innovation accelerating integration, new growth drivers flourishing, and domestic demand potential continuously being released, facilitating smoother domestic and international dual circulation The fundamentals of the macro economy are long-term positive, and a steady appreciation of the RMB exchange rate is expected. At the same time, due to a large trade surplus and an overall low amount of foreign exchange settlement in the past three years, we have accumulated significant settlement pressure. Under the current expectation of RMB appreciation, a wave of settlement has already begun, and the short-term surge in demand for RMB is likely to create a positive cycle of "exchange rate appreciation -> higher settlement volume -> further exchange rate appreciation." Will the RMB exchange rate accelerate its appreciation in the future?

## 1 How will the central bank respond to RMB appreciation?

**1.1 What is the central bank's stance?**

Some investors in the market believe that our country will intervene in the exchange rate due to export pressure, but export pressure does not constitute a policy reason for the central bank to "guide depreciation." "China is a responsible major country and has no need or intention to gain an international trade competitive advantage through exchange rate depreciation."

—— January 15, 2026, Deputy Governor Zou Lan answered reporters' questions

This is actually consistent with our country's recent attitude towards the relationship between foreign exchange and exports.

"China does not seek to gain international competitive advantages through exchange rate depreciation."

—— July 14, 2025, Deputy Governor Zou Lan answered reporters' questions

The central bank will not intervene in the exchange rate due to exports, but this does not mean it will allow the exchange rate to appreciate freely. Currently, the main reason for intervening in the exchange rate is to prevent one-sided trends and herd effects, guiding the exchange rate to fluctuate in both directions.

"The external situation remains complex and severe, with uncertainty in the magnitude and pace of interest rate adjustments by major economies, and geopolitical shocks may continue to exist, which will have a certain disturbance on the exchange rate trend. The RMB exchange rate is expected to continue to fluctuate in both directions and maintain elasticity."

—— January 15, 2026, Deputy Director Li Bin answered reporters' questions

"From the external environment, this year the global economy is expected to grow moderately, and major developed economies may continue to cut interest rates, which will help stabilize our foreign exchange market. Of course, there are still many uncertainties and unpredictable factors in the international financial market and geopolitical field. We will continue to strengthen monitoring of cross-border capital flows, enhance the resilience of the foreign exchange market, improve macro-prudential management and expectation management, maintain the stable operation of the foreign exchange market, and keep the RMB exchange rate basically stable at a reasonable equilibrium level."

—— January 15, 2026, Deputy Director Li Bin answered reporters' questions

It can be seen that two-way fluctuation remains the current policy tone for the exchange rate. So, in the face of the current pressure for RMB appreciation, what tools does the central bank have at its disposal, and what historical experiences can be referenced?

**1.2 What measures does the central bank have to intervene in RMB appreciation?**

Overall, the central bank has several tools to regulate RMB appreciation, including expectation guidance, adjusting counter-cyclical factors, forward foreign exchange sale risk reserves, foreign exchange deposit reserves, and macro-prudential parameters for cross-border financing.

 From 2020 to 2021, in the face of the dislocation of domestic and international economic cycles due to the impact of the pandemic, the RMB exchange rate experienced a dramatic switch from depreciation pressure to rapid appreciation. The central bank's regulatory approach was also flexibly adjusted, quickly shifting from the initial "expanding inflow" to the subsequent "preventing overheating," with the use of tools appearing particularly precise and restrained.

**1.2.1 2020: Policy Shift from "Expanding Convenience" to "Returning to Neutral"**

At the beginning of 2020, affected by the sudden outbreak of the pandemic, global financial markets were turbulent. To facilitate cross-border financing for domestic institutions and expand the use of foreign capital to cope with the impact, the central bank and the State Administration of Foreign Exchange raised the macro-prudential adjustment parameter for all-caliber cross-border financing from 1 to 1.25 on March 11. This measure aimed to enhance the cross-border financing limits for enterprises and financial institutions, encouraging foreign capital inflow, and played a role in supplementing liquidity and stabilizing expectations against the backdrop of pressure on the RMB exchange rate.

However, as the supply chain in China began to recover ahead of others in the second half of the year, the RMB entered a strong appreciation cycle. The central bank promptly activated counter-cyclical adjustment tools to "correct" this. On October 12, the central bank lowered the foreign exchange risk reserve ratio for forward foreign exchange sales from 20% to 0, significantly reducing the cost of forward foreign exchange purchases for enterprises, aiming to increase demand for foreign exchange purchases through market-oriented means and thus ease the unilateral appreciation momentum of the RMB.

By the end of 2020, the appreciation pressure remained unabated, and regulatory authorities further tightened the "gates" on cross-border financing. On December 11, the central bank, together with the State Administration of Foreign Exchange, adjusted the macro-prudential adjustment parameter for financial institutions' cross-border financing from 1.25 back to 1. This meant that the cross-border financing limits for financial institutions were reduced, with regulators aiming to guide banks to market-adjust their foreign exchange asset-liability structures and suppress pro-cyclical capital inflows. Meanwhile, the self-regulatory mechanism of the foreign exchange market also began to intensively deploy "risk-neutral" work in December, guiding market participants to establish the concept of "preserving value rather than appreciating" through soft macro-prudential constraints, thereby reducing speculative foreign exchange trading behavior.

**1.2.2 2021: Use of "Heavyweight" Tools to Deeply Reclaim Foreign Exchange Liquidity**

Entering 2021, although the RMB exchange rate experienced two-way fluctuations, it remained generally strong. The central bank's regulatory measures further upgraded, focusing on adjusting the balance of foreign exchange supply and demand and managing market expectations.

At the beginning of the year, the central bank continued the macro-prudential approach of "broad out, strict in." On January 5, it raised the macro-prudential adjustment coefficient for domestic enterprises' overseas loans from 0.3 to 0.5, aiming to support enterprises in "going global" by increasing capital outflow to balance cross-border capital flows; just two days later, on January 7, it lowered the macro-prudential adjustment parameter for enterprises' cross-border financing from 1.25 to 1. By this point, the cross-border financing parameters for both financial institutions and enterprises had returned to pre-pandemic levels, further restricting the inflow of pro-cyclical capital In mid-2021, facing the continued strength of the RMB exchange rate, the central bank activated a more powerful quantitative tool—the foreign exchange deposit reserve ratio. On June 15, the central bank raised the foreign exchange deposit reserve ratio for financial institutions by 2 percentage points (from 5% to 7%) for the first time since 2007. This move directly locked in the dollar liquidity within the banking system and reduced the supply of foreign exchange in the market.

However, the strong export-driven settlement in the second half of the year still brought a surge in foreign exchange settlement. To address this, the regulatory authorities strengthened expectation management. At the foreign exchange market self-discipline mechanism meeting on November 19, it was clearly emphasized that financial institutions "should neither assist enterprises in speculative trading nor engage in speculation themselves," further consolidating a risk-neutral orientation. On the other hand, at the end of the year, decisive action was taken again. On December 15, the central bank raised the foreign exchange deposit reserve ratio for the second time that year by 2 percentage points (from 7% to 9%).

This series of intensive measures, by absorbing domestic dollar liquidity, suppressing unilateral appreciation expectations, and short-term settlement impulses, released a clear policy signal to the market: the central bank does not wish to see a sustained unilateral trend in the exchange rate and is committed to maintaining basic stability of the exchange rate at a reasonable and balanced level.

**1.2.3 Overview of Other Exchange Rate Control Tools**

In addition to the tools mentioned above, the central bank can also guide market expectations through the counter-cyclical factor. The counter-cyclical adjustment factor is a macro-prudential tool introduced by the central bank in May 2017 in the RMB midpoint quotation model, aimed at countering the pro-cyclical sentiment in the foreign exchange market. When forming the daily RMB to USD midpoint price, the quoting banks can make certain deviations from the previous day's closing price based on the counter-cyclical factor. When the market shows unilateral depreciation or appreciation expectations, or when the exchange rate deviates from fundamentals, the counter-cyclical factor can play a buffering role. Its usage is flexible: when depreciation pressure is high, a positive factor is activated to boost the RMB; when appreciation pressure is high, the factor's influence can be weakened or temporarily suspended, allowing the midpoint price to lean more towards market supply and demand.

In practice, in 2017, when the RMB depreciated too quickly against the USD, the central bank activated the counter-cyclical factor to make the midpoint quotation slightly stronger than the market, stabilizing and rebounding the RMB. By early 2018, when the RMB began to appreciate rapidly, the central bank judged that market expectations had become rational and adjusted the counter-cyclical factor to neutral (essentially suspending it) starting in January of that year. Subsequently, in the second half of 2018 when the RMB depreciated and in the second half of 2022 when the RMB faced pressure, the counter-cyclical factor was partially restored to curb depreciation expectations.

In addition, when the US dollar index strengthens or there are clear expectations of strengthening, the central bank often issues central bank bills in the offshore market to absorb RMB liquidity, thereby increasing the cost for speculators to short the RMB.

Some investors believe that the central bank bills issued in September and December 2025 are evidence that the central bank is intentionally guiding the RMB to appreciate. However, we believe that the issuance of central bank bills in September may have been a response to the temporary strengthening of the US dollar index (due to strong US economic indicators and increased volatility in European and Japanese politics), aimed at alleviating the depreciation pressure on offshore RMB In December, the overall issuance of central bank bills was relatively low, which may indicate a policy intention to guide enterprises to gradually convert foreign exchange and release previously accumulated foreign exchange, but it is far from guiding the appreciation of the renminbi.

**1.3 Surge in foreign exchange settlement, is the central bank settling with banks?**

Since 2017, the balance of foreign exchange reserves has fluctuated within a narrow range, indirectly confirming that the central bank is transitioning from "quantity-based control" to "price-based control" in terms of exchange rate management. The changes in foreign exchange reserves more reflect the willingness of commercial banks to actively settle foreign exchange with the central bank, which is a spontaneous market behavior. Since 2017, the balance of foreign exchange reserves has remained stable within a narrow range of 21 trillion to 22 trillion renminbi, indicating that the central bank has basically stopped directly regulating exchange rate prices through the absorption and release of foreign exchange reserves.

The central bank's reduction in the use of foreign exchange reserves aims to minimize the direct impact on market liquidity and avoid sending strong intervention signals. The changes in foreign exchange reserves directly correspond to the issuance or withdrawal of base currency, which is a quantitative monetary policy tool with significant power and wide-ranging effects, and may be misinterpreted by the market as a strong policy direction signal, triggering fluctuations in the financial market. The "silent" trend after 2017 reflects the maturity of the central bank's policy thinking: to avoid passive interference with the independence of domestic monetary policy due to exchange rate stability. In the absence of extreme market panic, the central bank prefers to use counter-cyclical factors, foreign exchange deposit reserve ratios, and other macro-prudential tools, or to operate through state-owned banks in offshore markets, rather than directly using foreign exchange reserves.

In addition, avoiding being labeled as a "currency manipulator" may also be an important consideration for the central bank to maintain a stable scale of foreign exchange reserves.

This strategic restraint is not only to avoid "picking up others' teeth" but also to demonstrate to the international market the determination to marketize the renminbi exchange rate formation mechanism.

**Specifically looking at the changes in foreign exchange reserves: from January 2017 to December 2020, the moderate decline in foreign exchange reserves was mainly influenced by external uncertainties leading to capital flow pressures and changes in the central bank's liquidity injection methods.** During this period, trade frictions and fluctuations in global risk appetite led to an increase in market demand for foreign exchange purchases and a decrease in settlement willingness, resulting in capital outflow pressures or insufficient foreign exchange inflows. At the same time, the central bank's policy focus shifted to actively injecting liquidity through tools such as MLF, reducing reliance on passive injections of foreign exchange reserves, leading to a slight contraction in foreign exchange reserves without significant changes.

**From January 2021 to March 2024, the rebound in foreign exchange reserves was driven by strong trade surpluses and commercial banks' foreign exchange reserve exchanges.** The resilience of exports after the pandemic and record-high trade surpluses provided a solid foundation for foreign exchange supply. On the other hand, some banks converted foreign exchange reserves into renminbi, resulting in an increase in "foreign assets - foreign exchange" on the central bank's balance sheet and a decrease in "foreign assets - others." **From April 2024 to January 2026, the reasons for the decrease in foreign exchange reserves may be due to the selling pressure from hedging banks and the moderate stabilization of the RMB exchange rate.** The market still has depreciation expectations and capital flow disturbances during certain periods. The central bank may passively consume foreign exchange reserves while stabilizing the exchange rate and managing cross-border capital flows.

**What impact does the central bank's foreign exchange settlement have?**

Foreign exchange settlement generally goes through two stages: commercial banks conducting foreign exchange settlement for clients and the central bank settling with commercial banks. These two stages have distinctly different impacts on the liquidity of the banking system. The first stage involves commercial banks responding to the "RMB appreciation expectation" demands of enterprises or residents, increasing foreign exchange assets on the asset side and converting clients' foreign exchange deposits into RMB deposits on the liability side; since the statutory reserve requirement ratio for RMB deposits (about 9% for large banks) is significantly higher than that for foreign exchange deposits (4%), this process essentially consumes the banks' excess reserves, leading to a temporary contraction in bank funding. The second stage occurs when commercial banks settle with the central bank for regulatory indicators or risk management considerations, at which point the central bank's foreign exchange reserves increase on the asset side, and base currency is injected on the liability side, which truly brings about an expansion of liquidity in the market.

Current data evidence suggests that foreign exchange settlement seems to still be in the first stage, primarily reflected in the continued decrease in the central bank's foreign exchange reserves, while M0 and M1 have significantly increased. From the perspective of the central bank's assets, although the net foreign exchange settlement funds recorded a historical high in December 2025, foreign exchange reserves did not show significant growth, indicating that the "second stage" of commercial banks settling with the central bank has not occurred on a large scale. From the perspective of money supply, December's M2 seasonal performance exceeded expectations, with M0 and M1 both at seasonal highs, reflecting that a large amount of settlement funds may have been converted into "cash," "demand deposits," or "money market funds held by non-deposit institutions," remaining in the banking system and market; this divergence of "high settlement" and "low foreign exchange reserves" confirms that funds are currently mainly accumulating at the commercial bank level and have not yet been transformed into base currency injection through the central bank's balance sheet expansion.

In the first stage, the pressure on the bank's liability side may be significant, which could also be one of the reasons for the central bank increasing liquidity injections in January. Since settlement funds are currently mainly stuck in the "client settlement" stage, the conversion of foreign exchange deposits to RMB deposits leads to an increase in statutory reserve occupation, thereby compressing the space for excess reserves, posing a challenge to the stability of the bank's liability side.

Moreover, historically, there is no necessary correlation between changes in the central bank's foreign exchange reserves and the funding situation, as the central bank has a wealth of tools to maintain reasonable liquidity amid the optimization of the monetary policy regulation framework.

## 2 How does exchange rate appreciation affect the capital and bond markets?

**Reviewing history, the relationship between interest rates and exchange rates mainly has the following characteristics:**

Firstly, interest rates and exchange rates are essentially two sides of the same coin regarding fundamentals and policies both domestically and internationally. Typically, when the RMB appreciates, interest rates rise, and vice versa. Before 2014, due to the weak marketization and benchmark nature of the RMB/USD central parity rate, and the strong unilateral appreciation expectation of the RMB, the correlation between exchange rates and interest rates was weak; however, after the "811 exchange rate reform," the trends of both became generally consistent. Usually, an improvement in economic fundamentals and a tightening of monetary policy will push interest rates up while also supporting exchange rate appreciation; conversely, when there is significant downward pressure on the economy, a pattern of "exchange rate depreciation and interest rate decline" often emerges.

Secondly, fluctuations in exchange rates can constrain monetary policy, thereby indirectly affecting the rhythm of interest rates. Although major central banks primarily focus on "internal balance," rapid unilateral changes in exchange rates may influence monetary policy operations. For example, during the Federal Reserve's interest rate hike cycle from December 2015 to January 2019, amid escalating China-U.S. trade tensions in 2018 and significant depreciation pressure on the RMB, despite high expectations for loose monetary policy at that time, there were no interest rate cuts throughout 2018, only reserve requirement ratio reductions.

For the present, does exchange rate appreciation necessarily correspond to pressure on the domestic bond market? Does exchange rate appreciation affect monetary policy operations?

We believe not necessarily, as 2021 is the best example.

Benefiting from being the first to emerge from the pandemic, rapid export growth, and strong willingness of micro entities to convert foreign exchange, the exchange rate maintained an appreciation trend in 2021. However, on the other hand, due to the peak of domestic fundamentals in the first half of the year, the decline in real estate and infrastructure momentum under the transition of old and new driving forces, and the intensified operating pressures on downstream enterprises due to rising commodity prices, various factors resonated, leading monetary policy to gradually shift towards a loose stance, with consecutive reserve requirement ratio cuts in July and December, maintaining stable liquidity. At the same time, the decline of old driving forces increased the pressure of asset scarcity for institutions, collectively creating a bull market in interest rates.

Therefore, in a non-unilateral exchange rate scenario, domestic policies and fundamentals remain the dominant factors for interest rates. Although the volume of foreign exchange conversion by micro entities has increased, and the central bank's systemic support for commercial banks' foreign exchange conversion is unlikely, as long as domestic fundamental pressures persist and the central bank maintains a supportive attitude, the overall capital and bond markets will be secure, with interest rates still "dominated by us," maintaining favorable low levels.

Risk warning and disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not consider individual users' specific investment goals, financial conditions, or needs. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk

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