Recent Independent Performance of the RMB: Three Core Logics

I. The Recent Accelerated Appreciation of the RMB: An Independent Trend

After the RMB exchange rate broke “7” at the turn of the year, it has again accelerated its appreciation recently. Since breaking above the 7.0 mark at the end of December last year, the RMB exchange rate has continued to appreciate at the start of 2026. After the Spring Festival, it saw a “good start,” with three consecutive trading days of strong gains. On February 26, the offshore RMB/USD exchange rate hit a high above 6.83 during trading, setting a new record since April 2023.

Even more impressive is that since February, the RMB's appreciation has been a "proactive appreciation" achieved against a strong dollar, outpacing other major non-dollar currencies. The RMB appreciation since November last year mainly reflected the weakening dollar and year-end “settlement surge,” which influenced market expectations — with characteristics of “passive appreciation” and expectation-driven appreciation. However, since February, although the dollar rebounded due to factors like the nomination of Waller and geopolitical risk aversion, most major non-dollar currencies depreciated, while the RMB continued to rise against the trend, leading major non-dollar currencies in performance. This is a “proactive appreciation” supported by strong logic.

What is the logic behind the RMB’s proactive appreciation recently? There are three core drivers for the current appreciation cycle: release of settlement demand, rising PPI, and improved capital market returns. These three factors are forming a positive resonance, jointly pushing this round of RMB appreciation.

II. Core Logic of RMB Appreciation: Release of Settlement Demand

The accelerated release of RMB settlement demand has become an important support for the strong RMB exchange rate recently. In December last year, banks’ net settlement-for-customers reached an astonishing $99.9 billion, hitting a monthly record high since data began. The most recent January data hit $88.8 billion, a slight decrease from the previous month but still the third highest on record.

Seasonality and lag of settlement are the main drivers behind this. At the turn of the year, exporters traditionally repatriate profits and settle foreign exchange, making it a peak season for RMB appreciation driven by strong supply and demand; historical experience shows that improvements in the settlement rate lag behind RMB appreciation by 3-6 months. The recent surge in settlement scale gradually reflects the earlier RMB appreciation’s influence on settlement behavior.

Looking ahead, as lagging settlement demand continues to be released, combined with rising net forward settlement, future settlement needs will still support the RMB exchange rate. Since 2025, banks’ net forward settlements—a barometer of exchange rate expectations—have continued rising, reaching $39.3 billion in January, a new high since 2010. This shows that as expectations of Fed rate cuts and RMB appreciation have strengthened, exporters are no longer holding currency on the sidelines, but are locking in future rates in advance, providing support for the spot exchange rate.

Moreover, as the RMB enters an appreciation channel, the potential return of large amounts of settlement funds held overseas in previous years should not be underestimated. Despite strong exports in recent years, a large amount of foreign exchange earned through trade surpluses has not been converted into RMB, but held as overseas assets with higher expected returns. It’s estimated the scale has reached $700 billion since 2022. As the RMB enters an appreciation cycle, the return of these funds could provide significant momentum for RMB revaluation.

III. Core Logic of RMB Appreciation: Confirmation of PPI Uptrend

This round of RMB depreciation since 2022 has been mainly influenced by two underlying logics: first, domestic price deflation dragging the real effective exchange rate; second, price deflation leading to declining returns of Chinese assets—both pointing to prices.

PPI is also a key indicator for foreign investors to measure China’s economic fundamentals and domestic asset returns. Historically, PPI has been highly correlated with foreign capital inflows.

Recently, the confirmation of the upward trend in PPI is providing momentum for proactive RMB appreciation. Lately, with more domestic price hikes and the uptrend of PPI confirmed, expectations for economic improvements have strengthened. RMB exchange rate, as a key indicator reflecting domestic economic expectations, has absorbed this positive change.

Looking ahead, the new round of domestic price cycle recovery will positively reinforce the RMB appreciation cycle.

IV. Core Logic of RMB Appreciation: Improved Capital Market Returns

The A-share market’s “good start” and the restoration of foreign confidence in RMB assets have also been key supports for this round of RMB appreciation. In December last year, as A-shares showed strong performance, net settlement under securities investment hit a record $11.47 billion, and expanded further to $25.9 billion in January—reflecting ongoing restoration of foreign confidence and accelerated allocation to RMB assets, strongly supporting the RMB’s proactive appreciation. EPFR data shows active foreign capital has net flowed into A-shares for four straight weeks recently.

Globally, countries whose currencies have appreciated significantly have seen corresponding equity assets rise, further proving the mutual reinforcement between capital market returns and stronger exchange rates. Since February, proactively appreciating currencies such as the South Korean won, Taiwan dollar, and RMB have seen their equity assets lead the world in gains.

Currently, the positive cycle of Chinese asset revaluation and RMB appreciation is already emerging. It can be expected that continued exchange rate appreciation and capital flow reversal might lead to an accelerated revaluation of Chinese assets in the future.

V. RMB Appreciation Cycle: Which Industries Benefit?

There are four logics behind how RMB appreciation affects sector allocation: foreign capital return, lower import costs, lower liability costs, increased RMB purchasing power boosting demand, and, combined with prosperity expectations, these four focus tracks have been identified:

1. Industries benefiting from changing foreign capital preferences and strong consensus between domestic and foreign investors in growth sectors, including AI hardware (communication equipment, components, semiconductors, consumer electronics), leading manufacturing (batteries, auto parts, pharmaceutical chemicals), and nonferrous metals (industrial metals, energy metals);

2. Upstream resource products that benefit from domestic PPI uptrend, “anti-involution,” and the resonance of RMB appreciation lowering import costs, including steel, chemicals (plastics, chemical raw materials, agricultural chemicals, rubber), etc.;

3. Service consumption and high-end consumer sectors benefitting from increased RMB purchasing power and structural improvements in domestic demand, including duty-free, e-commerce, hotels and catering, etc.;

4. Industries with reasonable current valuations, marginal improvement momentum in prosperity this year, and likely to benefit from RMB appreciation in cost or liabilities, including aviation and airports, paper, logistics, etc.

Risk warning: economic data volatility, looser policy failing expectations, Federal Reserve rate cuts falling short of expectations, etc.

Source: Industrial Securities

Risk Warning and DisclaimerThe market contains risks and investment needs to be cautious. This article does not constitute personal investment advice and does not take into account the special investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their specific situation. Investing accordingly is at your own risk.