RMB appreciation, a boost for the "settlement tide"?

Since mid-October, the RMB has appreciated significantly while the US dollar has only slightly depreciated. Faced with this asymmetrical rise, the market attributes the RMB's appreciation to the “year-end settlements rush”, meaning that enterprises' concentrated sales of foreign exchange income at the end of the year push the exchange rate higher.

However, the latest report from Shenwan Hongyuan states: The main driving force behind the recent RMB appreciation is not the widely believed year-end settlement rush, but rather the central bank's active adjustment and changes in the external US dollar environment.

The report points out that the core indicator reflecting enterprises’ willingness to settle foreign exchange, the bank client settlement rate (excluding forward performance), hit a high of 63.1% in September, but dropped sharply for two consecutive months in October and November, falling to 54.1% and 52.0% respectively. This indicates that during the fastest appreciation stage of the RMB, actual settlement willingness among enterprises did not increase, but instead significantly decreased.

Additionally, multiple high-frequency market indicators also confirm this judgment. If there was indeed a large influx of settlement funds, the foreign exchange market would typically show characteristics such as rising swap points, widening onshore/offshore spreads, and increased spot trading volume. The actual situation is the opposite: relevant swap point spreads continued to narrow, RMB trading volumes shrank, and the spread between onshore and offshore rates did not widen. These micro signals show that the appreciation from late October to November is closely related to the central bank's guidance through the counter-cyclical factor; since December, the trend has been more highly synchronized with the US dollar index’s own weakness.

Recent appreciation is not settlement-driven; weakening US dollar may still provide support

Settlement rate data debunks the “settlement rush”. Although the RMB appreciated rapidly, data from the foreign exchange bureau show that the settlement rate dropped from the high of 63.1% in September to 54.1% and 52.0% in October and November, with the net settlement rate dropping from 4.6% in September to -8.3% in November. The banks’ client settlement and sale surplus also narrowed from $51.8 billion in September to $16.4 billion in November.

Multidimensional supporting indicators do not show accelerated settlement. Historical experience shows that a settlement rush usually comes with four major characteristics: rising swap points, increased inquiry trading volumes, widening onshore/offshore spread, and dropping foreign exchange deposits. But since November, the actual situation has been the opposite: swap point spread dropped from 97 pips to 36 pips, RMB spot inquiry trading volume shrank from $45.3 billion to $25.3 billion, the onshore/offshore spread narrowed, and foreign exchange deposits increased by $9.2 billion in November.

Central bank counter-cyclical adjustment and US dollar weakness are true drivers. Breaking down the stages of the RMB appreciation in 2025: from mid-October to late November, under the “three prices converging” policy, the central bank resumed the counter-cyclical factor, and the continually rising official rate guided the appreciation; since December, the US dollar weakened again, and the 1-month dynamic correlation between the RMB and USD quickly rose to 0.95, showing that exchange rate movements reverted to being US dollar dominated.

The “year-end settlement” pattern partially holds: trade settlements increase, but settlement rate improvement lags

Trade settlements do reliably increase in December. Data since 2017 shows that bank client settlements grow throughout Q4, with average settlement amounts in October, November and December at $141.4 billion, $148.9 billion, and $170.4 billion respectively. Settlement growth mainly comes from three areas: First, export income is mainly received in Q4, with December trade-related foreign income averaging $279.0 billion, the highest of the year; second, initial and secondary income in December shows noticeable growth due to accounting and dividend needs; third, the settlement rate rises slightly in December, though this trait is not very prominent.

Improvement in settlement rate lags by 1-2 quarters. Historical data shows that when the RMB strengthens, the sale rate quickly falls; but improvement in the settlement rate usually lags by 1-2 quarters. This is because speculators react quickly, while traders can hedge exchange rate risks with contracts, so they often only accelerate settlements 1-2 quarters after sustained RMB appreciation.

Spring Festival timing affects the peak in settlement rate. In years when the Spring Festival falls in February, the marked improvement in settlement rate shifts to the following January; in years when it falls in January, the settlement peak is in December. The Spring Festival in 2026 is in February, implying that settlement rate improvement may extend to January.

Net settlements also depend on services trade, capital account, etc. Services trade-related sales of foreign exchange are the main drag, related to personal currency exchange limits resetting at year-end and start. The capital account shows year-end effects only on an average basis, and actually was mainly driven by large-scale securities investment settlements in December 2020 and 2021. Settlements of securities accounts in those periods may have related to that year’s strong US stock rally and significant RMB appreciation.

Support for breaking “7” exists, but beware of three major risks

The “late” settlement rush may still help strengthen RMB exchange rate in the short term. Historical experience shows that after RMB appreciation for two quarters, the settlement rate tends to improve. In 2025 so far, the estimated “pending settlement demand” by subtracting settlement-sale surplus from trade surplus is second only to the same period in 2024; non-financial enterprise foreign exchange deposits have exceeded the February 2022 record, reaching a historic high of $561.8 billion. At the same time, US stocks have risen 16.2% in 2025 and RMB appreciated 3.7%, similar to 2020 and 2021, so improvement in securities account settlements is also likely. Historical data shows that under the support of a settlement rush, the RMB exchange rate in January may appreciate about 0.8% more than USD index changes.

Risks of US dollar rebound cannot be ignored. Currently speculative net short positions in the US dollar have reached a new high since 2008, with extreme short positions posing reversal risk. Although recent US non-farm payrolls are weak and CPI much lower than expected, November labor and inflation data are less reliable (affected by government shutdown, household survey response rate was only 64%, CPI used rare “carry-forward” method to fill gaps), and do not increase the probability of a January rate cut. If the rate cut does not come in January, the US dollar may rebound slightly.

The central bank’s “smoothing” of exchange rate overshooting may also impact the pace of rapid RMB appreciation. Since late November 2025, as the RMB appreciated quickly, the central bank withdrew the counter-cyclical factor rapidly, and the official rate was even notably weaker than onshore and offshore rates. As of December 19, the actual RMB central parity rate vs the theoretical rate was 172 points higher, the largest gap since 2022, showing that the central bank does not intend to guide RMB to appreciate too quickly. In addition, Citi’s China economic surprise index has fallen, January’s “good start” expectations gap and RMB risk reversal factor have risen; these factors also merit attention.

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