The "baton" behind the appreciation of the Renminbi: How the PBoC's rare signals are reshaping exchange rate expectations

The recent strength of the Renminbi is rewriting market expectations. USD/CNH approaches the psychological threshold of 7.00, despite China’s November economic data falling short of expectations, offshore Renminbi has broken a 14-month high. Behind this divergence, there is a clear and rare policy signal from the People’s Bank of China.

The Central Bank’s “Steering Wheel”: The New Logic of Middle Price Setting

The core driver of this rally comes from the PBoC’s shift in pricing behavior. Recently, the People’s Bank of China has made a historic adjustment to the setting of the USD/CNY middle price, fixing it above the model estimate. This is completely opposite to the routine practice of the past three years—previously, the PBoC usually set the middle price below the model value to maintain exchange rate stability.

OCBC Bank analysts believe this is a “deliberate action aimed at guiding the Renminbi on a gradual appreciation path.” In other words, the PBoC is using the middle price as a “steering wheel” to send a clear signal of appreciation: Beijing authorities want the Renminbi to strengthen, but in an orderly rather than rapid manner.

Exporters’ “Settlement Window”: A $1 Trillion Surplus and the Currency Exchange Wave

China’s trade surplus for the first 11 months reached $1 trillion. Behind this huge figure are large dollar positions held by many enterprises. Over the past two years, the inverted US-China interest rate spread has led exporters to hoard US dollars. Now, with the Fed’s rate cut expectations becoming clearer and the dollar index breaking below the 102 support level, a “cyclical settlement” phenomenon has emerged.

ING Forex analyst Chris Turner pointed out that the main reason for renewed interest in the Renminbi is the record-breaking trade data. A senior forex trader based in Shanghai revealed the true mindset of enterprises: “When the exchange rate drops from 7.10 to 7.05, companies start to worry—if they don’t convert back to Renminbi now, the cost of year-end bonuses will be higher.” This self-fulfilling appreciation expectation has strengthened the Renminbi’s resilience in the short term but also amplified economic imbalance risks.

The Currency Tool as an “Engine” for Economic Transition

Behind the Renminbi’s appreciation, there is also China’s strategic intent for economic transition. Brown Brothers Harriman analysts pointed out that a stronger Renminbi can reduce import costs, substantially enhance household purchasing power, and help China shift its growth model toward consumption-driven growth.

In the current environment, this has multiple strategic values: providing a buffer for domestic demand during the property market adjustment, hedging input costs amid global inflation, and using the exchange rate as a tool to push the export industry to upgrade. However, Standard Chartered and Goldman Sachs have issued warnings—7.00 is not just a psychological threshold but a red line for exporters’ profits. Rapid appreciation could backfire on export competitiveness and trigger a more severe economic slowdown.

Variables and Risks in 2026

How far and how fast the Renminbi can appreciate depends on the Fed’s decisions. ING believes that if the Fed cuts interest rates twice again in 2026 as expected, the dollar’s weakness could continue, and USD/CNH might fall below 7.00. But this outlook is not stable.

Goldman Sachs and other institutions warn that if US-China trade tariffs escalate, USD/CNY could rise to 7.40-7.50, contrary to appreciation expectations. Global commodity fluctuations could also impact the Renminbi, a major commodity currency. Capital Economics emphasizes that China will not actively devalue significantly to prevent financial instability but will need to balance export competitiveness.

The current market more resembles expectation trading. Some international funds are pre-positioning for a mid-term scenario: assuming the US-China interest rate spread converges, the dollar cycle weakens, and policy communication remains stable over the next two years, the Renminbi could gradually recover. Global investors are closely watching the 7.00 line—it is not only a psychological barrier but also a warning line for China’s export competitiveness.

If the appreciation accelerates too quickly, damaging export profits, the PBoC may intervene at any time by raising the foreign exchange reserve requirement ratio or strengthening macroprudential management to cool the market. For global investors, this means reassessing China’s asset pricing models, as the strategic value of the currency and the underlying reform commitments are becoming new variables.