China's RMB has reversed its depreciation since April and recently traded stronger than 7 RMB/USD as a widening goods trade surplus (goods surplus exceeded $1 trillion by November 2025) and a reduced services deficit point to a record current account surplus for 2025. Key drivers for continued RMB appreciation into 2026 include expanding external surpluses, easing US-China trade frictions, an undervalued RMB purchasing power amid lower Chinese inflation versus persistently higher US price levels (US GDP deflator rose 7.1%, 3.7%, 2.5% in 2022–24), and expected further USD weakness as the Fed has cut rates three times since September. The author forecasts a moderate, sustained appreciation toward ~6.8 RMB/USD in 2026 but flags risks from uncertain domestic demand and export competitiveness.
Market structure: A structurally larger current-account surplus (> $1tn in 2025) plus subdued Chinese inflation suggests upward pressure on CNY; exporters lose pricing power while importers, travel/leisure and FX-liability light corporates gain. Expect a modest re-pricing: USD/CNH moving from ~7.00 to ~6.80 by end-2026 (≈3% move) without dramatic capital-account liberalization, compressing hedging premia and boosting onshore bond demand. Risk assessment: Tail risks include abrupt US-dollar strength (unexpected US inflation or Fed hawkish surprise), PRC capital controls tightening, or a geopolitical shock that reverses capital flows — each could move USD/CNH ±5-10% in weeks. Near-term (days/weeks) volatility tied to US jobs/CPI and China trade prints; medium-term (3–9 months) driven by Fed rate path and bilateral trade talks; long-term (>1 year) shaped by structural current-account and domestic demand recovery. Trade implications: Cross-asset, a weaker USD plus stronger CNY favors CNH bonds and Chinese consumer and travel equities while pressuring dollar-funded exporters and commodity hedges; commodity prices may rise but RMB appreciation mutes input-cost pass-through to China. Volatility should fall if RMB slowly appreciates, tightening implied vols and making directional option structures cheaper. Contrarian angles: Consensus underestimates capital-control frictions and onshore/offshore rate disconnects — a 6.8 path is feasible but not guaranteed; markets may underprice the risk of PBOC intervention to slow appreciation. Historical parallels (post-2015 RMB regime shifts) show episodic reversals; prefer staged exposure with explicit stop/targets rather than full conviction bets.
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Overall Sentiment
moderately positive
Sentiment Score
0.45
