The underlying drivers behind the RMB breaking 7, is there still room for appreciation by 2026?

The strong performance of the RMB against the USD at the end of the year has attracted market attention. On December 25, the offshore RMB (USD/CNH) fell to 6.9965, hitting a low since September 2024, while the onshore RMB (USD/CNY) dropped further to 7.0051, returning to the level seen in May 2023. What are the underlying reasons behind this psychological threshold of 7 being broken?

Three forces driving the RMB’s strength

The continued decline of the US Dollar Index is fundamental. Under the dual influence of the Federal Reserve’s rate cut cycle and the global de-dollarization trend, the US Dollar Index has fallen over 10% this year, with a decline of more than 2% in the past month alone. This relative weakening of the dollar has created a favorable environment for the RMB to appreciate.

Clear guidance from monetary policy is also crucial. The People’s Bank of China (PBOC) has maintained an upward adjustment of the RMB’s central parity rate throughout the year, deliberately guiding the market to see the RMB continually strengthening by gradually raising the reference exchange rate. The consistency of this policy signal has provided strong support for the exchange rate.

The seasonal effect of year-end foreign exchange settlement cannot be ignored. China maintained a huge trade surplus in 2025, and as the year-end approaches, many enterprises conduct foreign exchange settlement operations, converting large amounts of USD into RMB, creating a phased supply pressure that further pushes up the RMB exchange rate.

In addition, the PBOC has maintained a cautious stance on monetary policy, without further interest rate cuts. Coupled with the tight liquidity in the offshore market at year-end, these factors have all contributed to the RMB’s rise.

Divergent views from professional institutions

Wang Qing, Chief Macro Analyst at Dongfang Jincheng, believes that “the weakening of the USD and seasonal foreign exchange conversions by exporters have driven the RMB’s strength.” He further pointed out that the continued appreciation of the RMB will enhance the attractiveness of China’s capital markets to foreign investors, which has practical significance for China’s financial market opening.

However, from a deeper economic fundamental perspective, many international institutions assess that the RMB still has room for undervaluation. Xing Zhaopeng, Senior Strategist at ANZ Bank, expects that in the first half of 2026, USD/CNY may remain in the 6.95-7.00 range; Goldman Sachs is more optimistic, believing that the RMB is undervalued by about 25% relative to economic fundamentals, and expects USD/CNY to fall to around 6.90 by mid-2026, further dropping to 6.85 by the end of the year; Bank of America has an even more optimistic view, believing that the easing of US-China relations will improve export prospects, and expects USD/CNY to fall to 6.80 by the end of 2026.

Appreciation potential vs. realistic challenges

According to forecasts from multiple institutions, the expectation that the RMB will continue to appreciate in 2026 is relatively consistent, but there are differences in the magnitude and timing of the appreciation. This reflects market recognition of the RMB’s exchange rate outlook, while also reminding investors to pay attention to external variables such as US-China relations and global economic changes.

The strengthening of the RMB exchange rate not only concerns individual investment returns but also impacts the operating costs of export enterprises, the direction of capital flows, and the attractiveness of Chinese financial assets to global investors. From this perspective, the ongoing appreciation is both a reflection of market forces and a result of policy guidance.