【TMGM Financial Recap】Entirely Different Drivers Underpin Renminbi’s Four-Year High and Dollar Strength

A 12 basis point rise took the renminbi’s central parity rate to 6.7208 on 19 October, its third consecutive business-day increase. Late in the New York session, the onshore renminbi traded at 6.6810, against 6.6822 offshore. Gains since the beginning of the year reached 4.38% for the central parity rate, 4.35% for the onshore spot rate and more than 4.1% for the offshore rate. The dollar strengthened as well: having recovered the 102 level during trading, the US Dollar Index ended the session at 101.98, a rise of 0.14%.

With a fixed 57.6% share, the euro dominates the six-currency US Dollar Index basket. Its weighting is stipulated by the index methodology, rather than being an estimate. The Japanese yen has a 13.6% share, followed by the British pound at 11.9%, the Canadian dollar at 9.1%, the Swedish krona at 4.2% and the Swiss franc at 3.6%. On 19 October, declines of 0.19% and 0.30% left the euro at 1.1212 and the yen at 158.52 respectively. Losses for the pound and Swiss franc were 0.10% and 0.28%, while the Canadian dollar alone strengthened, adding 0.33%. Weighting those movements yields positive contributions to the index of 0.11 percentage points from the euro, 0.04 percentage points from the yen and 0.01 percentage points from the Swiss franc. The Canadian dollar reduced the total by 0.03 percentage points. Taken together, the six currencies added 0.14 percentage points, fully accounting for the index’s rise that day. Eurozone bond markets provided another source of pressure on the euro. A 15 basis point increase brought France’s 10-year government bond yield to 4.93%; the French-German yield spread reached 146 basis points, and French sovereign CDS rose to a multiyear high. Withdrawals from French government bonds were also pulling the euro lower.

Dollar Conversions Drive the Renminbi Higher

September’s exports of US$447.18 billion represented a 36.3% year-on-year increase, with the monthly trade surplus reaching US$133.53 billion against August’s US$119.1 billion. These flows provided a separate source of support for the renminbi, distinct from the European developments behind the dollar’s 0.14% rise.

Wages, taxes and loan repayments require exporters to exchange their dollar receipts for renminbi. Banks’ foreign exchange settlement and sales surplus reached US$337.9 billion from January to August, far above the US$12.1 billion recorded a year earlier. The increase amounts to more than US$300 billion over seven months, with the funds ultimately entering the interbank market. Set against this support is the opposing effect of interest rate differentials.

A yield of 1.647% on China’s 10-year government bond compares with 5.141% on the US 10-year Treasury. The resulting 349 basis point differential leaves holders of renminbi assets earning 3.49 percentage points less in annual interest. Currency performance alters that comparison, however. Alongside a 1.647% coupon, a foreign buyer of 10-year Chinese government bonds has seen the renminbi’s central parity rate strengthen 4.38% this year. A simple sum puts the return at 6.03%, above the equivalent US 10-year Treasury yield of 5.141%. Hedging costs are omitted from this rough calculation, but its message is clear: this year, selling the renminbi short purely because of the 349-basis-point gap has resulted in losses.

The gap between offshore and onshore pricing on 19 October points to domestic dollar conversions as the source of upward pressure. At 6.6822, the offshore renminbi was 12 pips weaker than the onshore rate of 6.6810, meaning that exchanging dollars for renminbi offshore actually produced a less favourable rate.

Almost a year of tension between these two forces has seen dollar conversions take precedence this year. In CITIC Securities’ view, the shift in exchange rate expectations from depreciation to appreciation at the end of 2025 encouraged exporters to exchange more dollars, substantially weakening the relationship between the exchange rate and the China-US interest rate differential. As those conversions strengthen the renminbi, businesses retaining dollar holdings face growing pressure to act: waiting another day means obtaining fewer renminbi for their dollars. Until companies have exchanged most of those holdings, the cycle can accelerate under its own momentum.

Renminbi Gains Have Not Been Driven by the Central Parity Rate

In its third-quarter meeting statement, the Monetary Policy Committee coupled “uphold the decisive role of the market in exchange rate formation” with “guard against herd behavior and the self-reinforcement of irrational expectations.” According to the central bank’s own position, appreciation against the dollar has amounted to around 9% since 2025, and there is “neither a need nor an intention to gain a competitive trade advantage through currency depreciation.”

For dollar-priced commodities such as crude oil, iron ore and soybeans, a percentage point of currency appreciation cuts procurement costs by one percentage point. September’s 6.3% year-on-year PPI increase makes slightly cheaper imported raw materials a source of relief for downstream businesses. For exporters, however, appreciation has the opposite effect: on a US$1 million order, a shift from 7.0 to 6.8 reduces receipts by RMB200,000. With net profit margins often below 5% at small and medium-sized exporters, that currency movement alone can eliminate more than half a year’s profit. Dollar-denominated exports rose 36.3% in September, compared with renminbi appreciation of 4.35% over the corresponding period. Netting off the currency gain still leaves exporters’ renminbi revenue growth above 30%, indicating that margins, rather than orders, have borne the impact of appreciation to date. The third-quarter meeting statement concluded with the unchanged commitment to “keep the renminbi exchange rate basically stable at a reasonable and balanced level”.

Renminbi Appreciation Prospects Hinge on Remaining Dollar Holdings

Estimating that the renminbi is undervalued by 20% to 25%, Goldman Sachs’ Kamakshya Trivedi has put forward 6.40 within a year. CITIC Securities instead draws its argument from the make-up of the trade surplus. Growth in this year’s surplus has been generated by non-AI goods, while global manufacturing conditions have remained largely unchanged. On that basis, the foundations underpinning the renminbi remain intact.

What divides the views is the amount of dollars businesses still hold. Although January-to-August conversions totalled US$337.9 billion, a comprehensive public measure of the remaining pool is unavailable. Exporters’ retained share of dollar receipts, overseas subsidiaries’ dollar deposits and outstanding receivables are not captured by foreign exchange settlement and sales statistics. Maintaining September’s US$133.53 billion pace would leave approximately another US$400 billion of trade surplus to be dealt with in the fourth quarter. The calculation assumes only that exports neither pick up further nor fall.

The dollar’s trajectory adds a further uncertainty. A continuation of France’s latest turmoil through the budget vote, accompanied by further European capital flows into dollar assets, would allow a strengthening US Dollar Index to restrict the renminbi’s appreciation potential. Separate sources of support explain why both currencies rose on 19 October: fiscal risks in Europe supported the dollar, while domestic demand to exchange dollar receipts supported the renminbi. Were Europe’s flight to safety to develop into a worldwide dollar shortage, the premise behind those simultaneous gains would no longer apply.