The recent strong performance of the renminbi has drawn significant attention in global foreign exchange markets. With the renminbi officially breaking through the 7.0 mark against the US dollar, it reflects the combined impact of market expectations for China's economic recovery and a weakening dollar. While the People's Bank of China has shown flexibility in setting the central parity rate in the face of bullish pressure, it has also signaled its desire to prevent the exchange rate from appreciating too rapidly. This indicates that the authorities are attempting to strike a balance between "market liberalization" and "exchange rate stability" to prevent a large-scale influx of short-term speculative funds.
The RMB has returned to the "6" range.
The offshore exchange rate (CNH) briefly broke through the 7.0 mark on December 25 (entering the 6.99 range), reaching a new high since the end of 2024. Subsequently, due to market profit-taking and guidance from the official central parity rate, it has now slightly rebounded to above 7.0.
The onshore market (CNY) is limited by a daily trading range (with a 2% fluctuation limit around the midpoint), and reacts slightly slower than the offshore market, but it also remains at a near 14-month high.
The yuan's exchange rate broke through the 7.0 mark against the US dollar, signifying a breach of psychological and technical resistance levels established since 2024. This surge was primarily driven by expectations of a Federal Reserve (Fed) interest rate cut, foreign capital inflows back into the Chinese stock market, and increased corporate demand for foreign exchange settlement.
The People's Bank of China's central parity rate signals a "slow bull market".
According to Bloomberg , the People's Bank of China (POBC) has recently shown greater flexibility in its exchange rate management. In the early stages of the yuan's strong appreciation, the central bank did not take drastic intervention measures, which the market interpreted as "concessions to the bulls." This approach helps increase the two-way volatility of the exchange rate and reduces long-standing market expectations of unilateral yuan depreciation or appreciation. However, this "concession" is not unbridled indulgence, but rather allows the market mechanism to play a greater role in pricing.
Despite the yuan's exchange rate breaking through 7.0, the PBOC subsequently conveyed a clear policy intention through its daily fixing rate. Observational data shows that the official fixing rate was repeatedly significantly lower than market analysts' expectations, a typical signal suggesting that the official goal is to guide the yuan onto a "gradual appreciation" path, rather than a sharp appreciation, to avoid excessively impacting export competitiveness.
The trade-off between macroeconomic factors and industrial competitiveness
While a rapid appreciation of the RMB may help reduce import costs and attract foreign investment into the bond and stock markets, while also reassuring China's trading partners, it will also put pressure on labor-intensive export industries. As China currently strives to boost domestic demand, stable exports remain a crucial pillar supporting GDP growth. Therefore, the PBOC's future operational focus will be on expectation management, ensuring the exchange rate fluctuates around a reasonable equilibrium level through fine-tuning liquidity and the central parity rate, thus preventing exchange rate volatility from causing instability in the financial markets.
As the People's Bank of China adopts a cautious stance, Wall Street banks, including Goldman Sachs and Bank of America, predict that the yuan will appreciate to below 7 by 2026. Even within China, a growing number of domestic economists and former central bank officials are calling for a stronger yuan to help the economy reduce its over-reliance on exports and ease trade tensions.
This article, "RMB Breaks Through 7 Mark: PBOC Signals Slower Rise to Stabilize Market," first appeared on ABMedia .
