Today's midpoint is much lower than market expectations, with the deviation reaching its largest since 2018! The central bank shows its stance: Has the renminbi risen too quickly?

Today's midpoint is much lower than market expectations, with the deviation reaching its largest since 2018! The central bank shows its stance: Has the renminbi risen too quickly?

The Chinese central bank today set the daily reference rate for the renminbi significantly weaker than market expectations, with the degree of deviation reaching a record high.

On the 26th,the RMB/USD central parity rate was set at 7.0358, up 34 points, marking the highest since September 30, 2024; the previous trading day's central parity rate was 7.0392, the previous official closing price was 7.0066, and the last night closing price was 7.0058.

This level is 301 points weaker than the average expectation of traders and analysts surveyed by Bloomberg. The magnitude of the deviation not only reflects the regulator's guidance intentions, but is also the largest gap between the central parity rate and market forecast since the survey began in 2018.

The setting of the central parity rate comes as the offshore renminbi is rebounding strongly. On Thursday, the offshore RMB broke through the psychologically important 7.0 level for the first time since September 2024. Although the current parity rate is still stronger than the previous trading day, it is set significantly weaker than market expectations.

Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group, believes that the signal sent by setting the central parity rate this way shows that the Chinese central bank does not want the RMB to appreciate too quickly. This aligns with its recent commitment stated at the quarterly monetary policy meeting. According to CCTV News, the People's Bank of China recently held its fourth quarter 2025 monetary policy committee meeting. The meeting emphasized enhancing the resilience of the foreign exchange market, stabilizing market expectations, preventing excessive exchange rate fluctuations, and maintaining basic stability of the RMB exchange rate at a reasonable and balanced level.

Drivers Behind Appreciation: Catch-up Gains and Seasonal Factors

As a key tool for guiding market expectations, the central parity rate determines the daily trading range of onshore RMB. Although offshore RMB has consolidated around 7.0024 after continuous recent rises, strategists say the recent weak setting of the central parity rate, combined with occasional dollar purchases by state-owned banks, aims to curb speculative positions and prevent one-sided appreciation of the RMB.

Tao Chuan of Guolian Minsheng believes that given the current backdrop of a weaker dollar and improved trade expectations, the recent RMB appreciation is a reasonable release of previous pressures. There are mainly three factors behind this: the weaker US dollar, catch-up gains due to shifting expectations, and concerns over the seasonal pattern of concentrated settlements at year-end and the beginning of the new year:

The US dollar index peaked on November 21 and has since continued to weaken, with the RMB accelerating its appreciation over the same period;After high-level talks between China and the US in Korea, a one-year period of trade détente was agreed upon, resulting in a phased release of RMB risk and a shift in expectations;According to normal yearly experience, net settlements at year-end and the beginning of the next year typically see a regular increase (in 2024, the effect was comparatively abnormal due to tariff concerns).

Guolian Minsheng Securities believes that, compared to the environment 14 months ago when the RMB last breached 7, the dollar index was around 100 and faced Trump-era inflation and tariff concerns; but now, the dollar index has fallen below 98 and tariff risk has faded in stages. From a financial asset price perspective, the current RMB appreciation is a catch-up and not excessive.

The Central Bank's Toolbox and Future Outlook

Looking ahead, how the central bank will manage exchange rate trends has become the focal point. Guolian Minsheng Securities believes that the recent adjustment of the central parity rate in a depreciating direction shows the central bank intends to cool down appreciation, but this is just the "initial stage." If appreciation pressure continues to mount, the authorities have more means at their disposal.

In terms of exchange rate tools, besides the parity rate, these include guiding expectations via official media, talks through the self-regulation mechanism, affecting liquidity through the market behavior of commercial banks, and adjusting cross-border financing macro-prudential parameters. Regarding other policy tools, analysts believe the central bank may implement necessary reserve requirement ratio (RRR) cuts or interest rate cuts as easing countermeasures, in coordination with the Federal Reserve's rate-cut cycle, to reflect "symmetrical management principles."

According to calculations by Guolian Minsheng Securities, based on expectations for the US dollar and the China-US interest rate spread next year, a reasonable potential level for USD/CNY next year is around 6.8. However, in the short term, with the central bank clearly sending a "stability" signal, aiming to more evenly spread out the macro impact from exchange rates, the one-sided rapid appreciation trend is likely to be curbed.

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