Core Viewpoint - The offshore RMB has surged past the 6.89 mark against the USD, reaching a low of 6.8825, marking a three-year high, driven primarily by corporate foreign exchange settlements rather than central bank intervention [1][3] Group 1: Market Dynamics - The RMB appreciated approximately 1.3% from the beginning of 2026 to February 11, while the USD index fell nearly 4%, indicating that the RMB's strength is partly due to the USD's weakness [5] - China's merchandise trade surplus reached a record high of $1.076 trillion in 2025, leading to a significant accumulation of USD by Chinese enterprises [5][7] - An estimated $1.1 trillion in pending foreign exchange settlements has built up over the past three years, with the Chinese New Year acting as a catalyst for a surge in corporate settlements [7] Group 2: Corporate Impact - The surge in RMB value has pressured profit margins for exporters, particularly in labor-intensive sectors like textiles, toys, and furniture, where even slight fluctuations in exchange rates can turn profits into losses [11][13] - Some companies are forced to lower prices to maintain orders, as the strong RMB diminishes their competitive pricing advantage in the global market [13] Group 3: Central Bank Response - The People's Bank of China (PBOC) has signaled that it will not allow excessive appreciation of the RMB while also preventing competitive devaluation, aiming for stability at a reasonable equilibrium [13][15] - The PBOC has a range of tools at its disposal to manage currency fluctuations, including adjusting foreign exchange reserve requirements and utilizing macro-prudential parameters for cross-border financing [15]

Group 1 - The report addresses three core questions regarding the RMB exchange rate in 2026: 1) How to assess the rise of the RMB? 2) How will the exchange rate rise and how will the central bank regulate it? 3) What impact does RMB appreciation have on stocks and bonds? [2][8] - The current appreciation of the RMB is deemed reasonable, supported by a decline in the US dollar index (over 10%), a narrowing of the China-US interest rate differential (approximately 110 basis points), and a decrease in the attractiveness of the RMB as a financing currency [2][7][10]. - The expected central level for the RMB exchange rate is around 6.8, with the central bank's regulation being crucial to avoid unnecessary overshooting [2][23]. Group 2 - The central bank's regulation follows a "symmetrical principle," meaning that just as it previously prevented excessive depreciation, it should also focus on regulating excessive appreciation to balance the economic impact of exchange rate fluctuations [2][23]. - Key regulatory measures include the use of the counter-cyclical factor in the central parity rate, guiding expectations through official channels, and reducing the reserve requirement for forward foreign exchange purchases [2][23][44]. - The report suggests that the RMB's appreciation can be divided into "non-overshooting" and "overshooting" phases, with historical data indicating that after overshooting, the central bank tends to gradually open the door to rate cuts, aiding in the return of liquidity to a neutral environment [2][47]. Group 3 - In the non-overshooting phase, the stock market benefits from cyclical recovery, favoring cyclical sectors, while the bond market may face pressure unless driven by overseas quantitative easing [2][56]. - Conversely, in the overshooting phase, economic expectations may suffer negative impacts, leading to generally subdued stock market performance, while the bond market may see increased probabilities of appreciation [2][56]. - Historical data shows that during non-overshooting phases, the stock market, represented by indices like the CSI 300, tends to perform well, while the bond market may not necessarily decline [2][56].