Renminbi Accelerates Appreciation: Suspense and Impact

Yesterday's "breakout" appreciation of the Renminbi exchange rate "hides mysteries." On one hand, the US dollar index did not show any abnormal fluctuations this week; on the other hand, after a slight "decoupling" between the stock market and the exchange rate in the previous period, the correlation between the two seems to have returned—shortly after the A-shares rebounded from the bottom yesterday afternoon, the Renminbi exchange rate accelerated its breakout appreciation. How should we view these changes? In summary, we believe this is a concentrated release of the previous "insufficient" appreciation of the Renminbi, and it may also be another confirmation of global capital reallocation against the backdrop of a relatively weak dollar.

Looking back at the accelerated appreciation of the Renminbi exchange rate this round, it began with the Fed's phased dovish stance at the Jackson Hole meeting last Friday: Jerome Powell hinted at a possible adjustment of policy stance at the Jackson Hole Global Central Bank Annual Meeting on August 22, leading to widespread market expectations of an increased probability of interest rate cuts in September, causing the dollar index to plunge that day, which created a favorable external environment for the Renminbi's appreciation; subsequently, domestic policies actively guided expectations, with the central bank's midpoint rate accelerating upward since August 25, cumulatively rising by 258 pips, reinforcing the market's signal to stabilize the exchange rate; finally, on August 28, after a strong rebound in the stock market, the Renminbi exchange rate completed its final breakthrough.

Therefore, the recent rise in the Renminbi exchange rate is the result of the Fed's policy shift, domestic policy guidance, and the restoration of market sentiment working together.

Of course, there are many reasons for the breakthrough, but we summarize the core logic as: the previously "stagnant" Renminbi accelerated its release under the influence of policies and the stock market:

From a medium-term perspective, the previous "stagnation" of the Renminbi has laid the groundwork for this round of catch-up appreciation. Since 2025, the dollar index has depreciated by nearly 10% from its January peak, but during the same period, the Renminbi midpoint rate has only risen by 1.2%, and the CFETS Renminbi exchange rate index has even hit a new low since 2021, reflecting the relative weakness of the Renminbi against a basket of currencies. This pattern of "dollar decline, Renminbi stagnation" has accumulated momentum for catch-up appreciation.

The short-term catalyst comes from the recent stabilization and rebound of A-shares, triggering a linkage between the stock and foreign exchange markets: The V-shaped rebound of the Shanghai Composite Index on August 28 and the offshore Renminbi's "breakout" appreciation were highly synchronized in timing; for example, after the Shanghai Composite Index hit the bottom at 13:35, it quickly rebounded, and the offshore Renminbi exchange rate also began to accelerate its "breakout" appreciation, showing the uplifting effect of market sentiment restoration on the exchange rate.

In terms of impact:

For the domestic market, the appreciation of the exchange rate helps stabilize market sentiment, and under the outperforming trend of A-shares, funds may further flow back. This year, the profit-making effect of A-shares has been significantly higher than that of US stocks, and the stabilization of market sentiment has also led to some funds beginning to flow back into the Chinese market, triggering a positive cycle of simultaneous rises in both stocks and the exchange rate As the U.S. earnings season comes to an end, Nvidia's lackluster quarterly report and the overdraft of easing expectations at the Jackson Hole meeting may limit the rebound of U.S. stocks. We believe that the Chinese market is likely to continue to outperform U.S. stocks, and the rebalancing of funds may continue (though the sustainability and scale remain to be observed).

In addition, unexpected appreciation may lead to a series of reactions such as the unwinding of carry trades and accelerated foreign exchange settlements, further accelerating appreciation. The renminbi may currently be a good carry currency, and the unexpected significant appreciation on August 28 will lead to the unwinding of related trades, with institutions buying renminbi and selling U.S. dollars, resulting in a large degree of appreciation in the short term. If it breaks through 7.10 subsequently, the unwinding of U.S. dollar deposits and accelerated corporate foreign exchange settlements will further exacerbate appreciation.

The short-term impact on domestic trade is not significant, and the appreciation of the renminbi against non-U.S. currencies such as the euro and yen is not obvious. Given that the current non-U.S. market has become the main driver of our exports, there is no need to overly worry about exports in the short term; however, for overseas, the significant appreciation of the renminbi against the U.S. dollar in the short term will exacerbate the transmission of tariffs on China to U.S. inflation, bringing further upward pressure on domestic inflation in the U.S.

So, how will the renminbi perform going forward, and how should we view the further development of the renminbi's "catch-up" rally?

We believe that there is still room for the renminbi exchange rate "catch-up" rally. In the current key window where A-shares stabilize and market sentiment recovers, stabilizing the renminbi exchange rate has become an important means to stabilize overall market sentiment. We expect that if the central bank relaxes constraints, the renminbi exchange rate may appreciate to around 7 under the current low position of the U.S. dollar index at 98.

However, it is worth noting that given that A-shares have stabilized in stages, to avoid excessive market elasticity causing volatility, the central bank may slow down the pace of adjusting the midpoint rate, guiding the exchange rate to return to a reasonable center through a "small steps, quick run" approach. Overall, appreciation is not the issue; the key is the speed of appreciation. We expect that before breaking through 7.10, the central bank may slow down the pace of midpoint rate adjustments but will not intervene too much; however, if it smoothly breaks through 7.10, the central bank will gradually intervene.

From a global asset allocation perspective, the renminbi's catch-up is an important reflection of fund reallocation, which is a positive narrative for A-shares. We still maintain a medium-term bearish view on the U.S. dollar, as in the context of a weakening U.S. dollar, international capital is shifting from low-yield U.S. dollar assets to high-yield renminbi assets such as A-shares, boosting the valuation recovery of core assets. This reallocation of funds not only improves the liquidity environment of A-shares but also strengthens market confidence in economic recovery and corporate profit recovery through the dual drive of "exchange rate appreciation + profit expectation increase," forming a virtuous cycle of "dual rise in stocks and exchange rates." Author of this article: Lin Yan, Shao Xiang, Wu Shuo, Source: Chuan Yue Global Macro, Original title: "RMB Accelerates Appreciation: Suspense and Impact (Minsheng Macro Shao Xiang, Lin Yan)"

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