The RMB appreciation pressure is prominent, with 7.00 becoming the "warning line" for economic imbalance — an in-depth reflection on 12 possible reasons for the overheating engine

Data Weakness Instead Boosts the Renminbi: Hidden Economic Risks Behind the Contrarian Logic

Offshore RMB (USD/CNH) has recently continued to strengthen, approaching the psychological threshold of 7.00. Surprisingly, despite China’s macroeconomic data in November underperforming expectations—both industrial output and retail sales falling short—the RMB did not follow the usual depreciation trend of previous years. Instead, it steadily appreciated as the US dollar index broke below the 102 support level.

This reversal—“good data, weak currency; bad data, strong currency”—signifies a fundamental reassessment by the market of the RMB’s short-term outlook. Analysts generally believe this reflects a reevaluation of “devaluation risk”: when exporters see exchange rates approaching 7.10 or 7.05, they no longer blindly bet on depreciation but start calculating the opportunity cost of missed exchange rates—especially as year-end bonuses are imminent.

Trade Surplus Breaks $1 Trillion: Economic “Overheating” Signal Behind Export Boom

China’s trade surplus for the first 11 months has surpassed $1 trillion, a figure particularly eye-catching in the current global economic environment. However, this should not be simply interpreted as proof of a robust economy. On the contrary, the over-reliance on export surplus growth is exposing core structural imbalances in China’s economy.

Over the past two years, the interest rate differential between the Fed and China has inverted, forcing export companies to accumulate large dollar positions, creating heavy foreign exchange costs. Now, with the Fed’s rate cut expectations gradually clarifying, these firms are caught in a “currency timing race”: observing dollar trends while calculating the opportunity cost of delayed conversions. ING forex analyst Chris Turner pointed out that this “periodic currency matching”—companies rushing to sell foreign exchange when the exchange rate improves—has driven recent RMB appreciation momentum.

A senior forex trader based in Shanghai revealed the true psychology of market participants: when seeing the exchange rate break through 7.10 and 7.05 consecutively, corporate executives begin to worry, “If we don’t convert now, costs will be higher at year-end.” This creates a self-fulfilling appreciation expectation, temporarily reinforcing the RMB’s upward trajectory but also amplifying potential economic imbalances.

Central Bank’s “Pricing Signal”: From Passive Stabilization to Active Guidance

Recently, the People’s Bank of China (PBOC) has shown a rare change in its USD/CNY midpoint pricing—setting the midpoint above the model-estimated value, rather than the habitual undervaluation of the past three years. This subtle but significant adjustment signals a strategic shift in China’s monetary policy.

Historically, the PBOC maintained exchange rate stability by undervaluing the midpoint to suppress excessive appreciation. Now, Beijing’s stance is markedly different: they are gradually and orderly guiding the RMB to appreciate. OCBC Bank’s analysis notes this as a “deliberate move,” aimed at avoiding sharp fluctuations while steadily pushing the RMB stronger. In other words, the central bank not only recognizes the pressure for appreciation but actively guides market expectations, seeking to realize currency strengthening within a manageable range.

“Engine Conversion” Strategy: Can a Strong RMB Help Rebalance the Economy?

The deeper logic behind RMB appreciation is closely tied to China’s long-term economic development strategy. BBH (Brown Brothers Harriman) succinctly states: a stronger RMB can effectively reduce import costs, substantially boosting household purchasing power, which is crucial for shifting toward consumption-driven growth.

In the current economic environment, this strategy has multiple implications:

• Buffer for domestic demand: During real estate market adjustments, a strong currency can inject purchasing power into consumption.
• Hedging input costs: Amid persistent global inflation, lowering costs for bulk imports.
• Forcing industrial upgrading: Raising export costs to compel export-oriented firms to restructure.

However, this strategy is not without costs. Standard Bank and Goldman Sachs have issued warnings: 7.00 is not only a psychological threshold but also a profit margin line for exporters. If appreciation accelerates too quickly, it could directly harm export competitiveness, potentially triggering a more severe economic slowdown and increasing growth pressures.

2026 “Overheating” Test: Dual Variables of US Cycle and Geopolitics

The future path of RMB appreciation depends on two core variables:

Short-term: Market will closely watch whether the PBOC adjusts the pace of lowering the midpoint. If the PBOC sets a higher midpoint to slow appreciation, the exchange rate may enter a period of oscillation, with momentum waning.

Medium to long-term: According to ING forecasts, if the Fed proceeds with two more rate cuts by 2026, the US dollar’s weakness will continue, increasing RMB appreciation pressure, and USD/CNH could break below 7.00. However, this scenario is not certain, as multiple risks exist:

• Trade policy reversal risk: Goldman Sachs warns that if US-China trade tensions escalate and tariffs intensify, USD/CNY could reverse and rise to 7.40–7.50, completely changing the appreciation logic.
• Commodity price volatility: As a major importer of commodities, China’s currency is susceptible to global commodity price swings, which could cause exchange rate fluctuations.
• Financial stability considerations: Capital Economics emphasizes that China will not intentionally devalue significantly to prevent financial risks, but must also balance the bottom line of export competitiveness.

The Truth About Anticipated Trading: Investors’ “Low-Position Replenishment” Logic

The current appreciation trend is essentially a market-driven trade based on multiple positive expectations. Global capital is preemptively positioning for a scenario where, over the next two years, US-China interest rate spreads narrow, the US dollar cycle weakens, and policy communication remains stable, allowing the RMB to undergo a “recovery appreciation.”

This is not a one-sided bet but a “low-position replenishment” under controlled risk conditions—investors are systematically adding to undervalued RMB assets. The whole market is watching the $7.00 line, which serves as both a psychological barrier, a “warning line” for China’s export competitiveness, and a critical point for economic growth engines.

The Hidden Risks of “Overheating”: New Challenges for Policy Tools and Market Balance

If the appreciation accelerates beyond expectations, damaging export profits, the PBOC may deploy various tools to cool the market: raising foreign exchange reserve requirement ratios (RRR), strengthening macroprudential management, or even intervening directly in the forex market. This demonstrates that Beijing still maintains significant policy flexibility.

For global investors, this means that China’s asset pricing models need a thorough update. Beyond traditional growth expectations and interest rate factors, the strategic intent behind RMB appreciation, reform commitments, and the depth of policy tools are becoming new variables that cannot be ignored. This “engine conversion” race has transcended pure exchange rate fluctuations and has become the ultimate test of China’s economic restructuring and competitiveness upgrading.