Following the offshore RMB exchange rate breaking 7 last Thursday, the onshore RMB exchange rate also successfully broke 7 this Tuesday. Our views on this are as follows:
<h2>We anticipate that the RMB exchange rate is likely to successively break through the previous highs of 6.8 and 6.3</h2>
We have been continuously indicating since 6.28's &#34;Can the 'June Pulse' Continue into July&#34;: The appreciation of the RMB is driving the accelerated return of cross-border capital, which is the foundation of this round of A-share bull market.
In our 10.12 report &#34;Changing Fortunes,&#34; we continued to emphasize: Since 2020, China's foreign export scale has been moving upward, and the expansion of the current account surplus in the balance of payments will drive the RMB into a medium to long-term appreciation cycle (similar to 2005-2013).
The RMB exchange rate should have entered a medium to long-term appreciation cycle starting in 2020, but the aggressive interest rate hikes by the Federal Reserve from 2022 to 2024 hindered this process; currently, the Federal Reserve has begun a rate-cutting cycle, and the RMB exchange rate is expected to return to a medium to long-term appreciation cycle.
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At the beginning of October, we anticipated that the RMB exchange rate would successively break through the previous highs of 6.8 and 6.3, and this judgment is being validated.
<h2>China's strong foreign export capacity is the &#34;cause,&#34; and the medium to long-term appreciation of the RMB exchange rate is the &#34;effect&#34;</h2>
Some investors are concerned that the appreciation of the RMB may suppress exports, thus questioning the sustainability of the RMB appreciation. We believe this reverses the causal chain between export expansion and exchange rate appreciation—
(1) Drawing on the experiences of the US and Japan: The United States and Japan entered their industrial maturity periods around 1945 and 1975, respectively. At that time, the strong foreign export capacity of US and Japanese manufacturing led to an expansion of the current account surplus, driving their currencies into long-term appreciation cycles lasting 10 years;
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(2) China officially entered its industrial maturity period around 2018. The strong foreign export capacity of Chinese manufacturing has led to an expansion of the current account surplus, driving the RMB exchange rate into a medium to long-term appreciation cycle.
Unless there is a situation similar to the exchange rate surge following the 1985 Plaza Accord in Japan, the trend of RMB appreciation will not hinder China's foreign export capacity. This is because China's export capacity is not conferred by the exchange rate but is driven by the global competitive advantages of its manufacturing during the industrial maturity period.
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<h2>The positive cycle of RMB appreciation and the reversal of corporate settlement/arbitrage transactions has just begun</h2>
In our October 12th report &#34;Changing Offensive and Defensive Shapes,&#34; we clearly pointed out that the aggressive interest rate hikes by the Federal Reserve in recent years have led to an expansion of the interest rate differential between China and the U.S., resulting in the depreciation of the RMB exchange rate. This has caused a broad unhedged foreign exchange gap for enterprises to reach as high as 6 trillion yuan, with interest arbitrage and foreign exchange trading funds flowing out close to 10 trillion yuan.
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The Federal Reserve's interest rate cut cycle has already begun, and the RMB exchange rate is returning to a medium- to long-term appreciation cycle. This will drive the return of unhedged foreign exchange funds and interest arbitrage funds back to China, while the return of cross-border capital will also strengthen the appreciation trend of the RMB exchange rate.
Currently, the total broad unhedged foreign exchange funds and interest arbitrage funds amount to about 16 trillion yuan. The positive cycle of &#34;RMB appreciation → cross-border capital return → acceleration of RMB appreciation trend&#34; has just begun, and there is still significant room for the RMB exchange rate to appreciate.
<h2>RMB Appreciation Expected to Become an Opportunity for Prosperity in 2026</h2>
In our December 28th report &#34;The Cycle of Kondratieff: The Starting Point of Prosperity in 2026,&#34; we pointed out that the Kondratieff depression period is often a period of prosperity for catching-up countries. China effectively entered this Kondratieff depression period in 2019, marking its prosperity phase as a catching-up country.
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However, from 2022 to 2024, China's prosperity has encountered temporary obstacles: (1) The Federal Reserve's aggressive interest rate hikes have led to the outflow of cross-border capital and national wealth, eroding the cash flow statements of the real sector; (2) The sharp decline in housing prices has severely eroded the balance sheets of the real sector.
Currently, with the initiation of the Federal Reserve's interest rate cut cycle:
(1) Cash flow statements have begun to recover: The Federal Reserve's interest rate cuts + RMB appreciation are accelerating the return of cross-border capital and national wealth, combined with the intensification of &#34;anti-involution&#34; policies, which are repairing the cash flow statements of the real sector;
(2) Balance sheets are set to recover by 2026: Debt reduction requires a massive amount of funds, which can only be provided by central bank QE. If the People's Bank of China were to hastily implement QE for debt reduction before the Federal Reserve's QE, it would lead to significant depreciation pressure on the RMB.
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In the past few years of RMB depreciation, the People's Bank of China could not implement QE for debt reduction; however, with the current increase in RMB appreciation momentum, the policy space for the People's Bank of China to implement QE for debt reduction is opening up. Once the Federal Reserve implements QE next year, it is highly likely that the People's Bank of China will also implement QE for debt reduction, at which point, similar to last year's extraordinary policies on September 24, substantial measures are expected to be implemented to repair the balance sheets of the real sector.
The cash flow statements of China's real sector are currently being repaired, and the appreciation of the RMB will open up policy space for balance sheet repair. China is expected to witness an exit from the &#34;deflation&#34; of 2022-2024 and move towards a period of prosperity in the Kondratiev wave by 2026.
<h2>Asset Allocation: Firmly Optimistic About RMB Assets</h2>
In the short term, a large amount of pending foreign exchange settlement funds and cross-border capital are expected to accelerate settlement/repatriation with the appreciation of the RMB, reinforcing the trend of RMB appreciation.
In the medium to long term, China's strong industrial strength, which brings export competitiveness, is the fundamental driving force behind the appreciation of the RMB.
The repatriation of cross-border capital, combined with the opening of policy space for debt reduction, is expected to sequentially repair the cash flow statements and balance sheets of the real sector. By 2026, China is likely to welcome the starting point of prosperity.
We continue to be firmly optimistic about RMB assets such as AH shares and government bonds, maintain a strategic allocation to gold, but remain cautious about speculative trading. For industrial metals, we focus on varieties such as copper, aluminum, and nickel, while US stocks and US bonds may maintain volatility.
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 objectives, 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

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Western Securities analysis believes that the long-term appreciation cycle of the RMB has begun, and it is expected that 2026 will mark the starting point of China's economic prosperity. Recently, the RMB exchange rate broke through 7, and it is predicted to continue breaking through 6.8 and 6.3. The appreciation of the RMB drives the return of cross-border capital, which is the foundation of the A-share bull market. Although some investors are concerned that appreciation may suppress exports, the analysis suggests that the causal relationship between RMB appreciation and export capacity should be re-examined. China's strong export capacity will drive the RMB into a medium to long-term appreciation cycle

Western Securities: The appreciation of the Renminbi has begun a major cycle, and 2026 may become the starting point for China's economic prosperity