Is the appreciation of the RMB just the beginning?

Event Since August 2025, the Chinese yuan has shown a continuous upward trend against the US dollar, with the offshore yuan exchange rate briefly surpassing the 7.0 mark on December 24, making the appreciation of the yuan a recent market focus. Key Points Since the third quarter, the yuan has accelerated its appreciation, with endogenous momentum gradually strengthening. Looking back at the USD/CNY trend in 2025, aside from the disturbances caused by Trump's "reciprocal tariffs" in April and the escalation of US-China trade frictions, the yuan has shown a continuous appreciation trend since the beginning of the year. In phases, the initial appreciation of the yuan was more passively catalyzed by expectations of loose US monetary policy and a weakening dollar, while expectations of increased US tariffs put pressure on the yuan against a basket of non-USD currencies. Since August, the appreciation of the yuan against the dollar has further accelerated. Breaking it down, in addition to the passive contribution from the weakening dollar, the yuan has also shifted from depreciation to appreciation against a basket of non-USD currencies, with the endogenous momentum for yuan appreciation strengthening. The triple framework of "push" and "pull" factors for yuan appreciation is gradually being validated. In our report on November 17, "Pattern Reshaping, New Yuan Appreciation - The Third Part of the Macro Narrative Trilogy," we first discussed the opportunities and potential for yuan appreciation, elaborating on why we believe the yuan has not been fully priced by the market, and proposed that there are three "push" and "pull" factors that can effectively help the yuan achieve appreciation. The logic has been gradually realized in the past month. On the pull side, the reversal of the counter-cyclical factor further demonstrates that this round of yuan appreciation stems from market forces. The current counter-cyclical factor turned positive in early December, indicating that the central bank, while recognizing the direction of this round of appreciation, has begun to gently adjust the pace of appreciation. The core of this round of yuan appreciation may more likely stem from market forces. We have analyzed in detail in "20251117 - Pattern Reshaping, New Yuan Appreciation" that past pressures on the yuan may become future potential. If the "stranded" funds under the current account from 2022-2024 and the funds that have cyclically "abandoned" Chinese assets return, the corresponding scale is roughly at the level of USD 1.2 trillion. Considering the increase in corporate foreign exchange settlement and sales at the end of the year, this may have boosted capital inflows, further enhancing the momentum for yuan appreciation. On the push side, the trend of a weakening dollar under loose US monetary policy has propelled the overall direction of yuan appreciation. In our overseas macro annual strategy report "Indispensable Easing," we elaborated on the core demands for loose monetary policy in the US in 2026, whether to alleviate government fiscal pressure, support AI, or bolster the economy's resilience, all of which rely on loose monetary policy as support. Therefore, the weakening dollar may be a precursor to subsequent global assets, and the recent rise in commodities, especially gold and silver, supports this logic. On this basis, as the US embarks on unexpected easing next year, US Treasury yields will follow downward, and the US-China interest rate differential will further narrow, significantly reducing the attractiveness of carry trade funds holding US Treasuries, which may further push up the yuan exchange rate Overall, under two factors, the appreciation of the RMB may just be the beginning. Looking ahead, as the pull and push for RMB appreciation gradually strengthen, the RMB will continue to appreciate actively; against this backdrop, we may see the arbitrage funds that have been "staying" abroad in recent years and the capital that has flowed out of China returning, which may continue to drive the recovery of risk appetite in the equity market. Main Text Risk Warning and Disclaimer The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk