Core Viewpoint - The three pillars supporting the RMB exchange rate—China-US interest rate differential, policy risk premium, and purchasing power parity—are shifting favorably towards appreciation, with the central bank's midpoint guidance and foreign capital FOMO sentiment acting as additional catalysts [2][5]. Group 1: RMB Exchange Rate Dynamics - The RMB/USD exchange rate has experienced fluctuations this year, initially appreciating in a weak dollar environment, then depreciating due to tariff concerns, and recently regaining upward momentum [4]. - The current trend shows a convergence of the RMB midpoint, onshore, and offshore rates towards the 7.0 level, supported by both fundamental factors and event-driven catalysts [4][5]. Group 2: Interest Rate Differential - The narrowing of the China-US interest rate differential has been a fundamental basis for the RMB's appreciation over the past three months [6]. - Since July, the yield on China's 10-year government bonds has risen over 20 basis points to above 1.8%, while the US 10-year Treasury yield has decreased from 4.5% to around 4.2%, leading to a significant narrowing of the nominal interest rate differential by nearly 50 basis points [7]. - Adjusting for inflation, the actual interest rate differential has further narrowed, with China's low inflation levels contrasting with a slight rebound in US inflation [7][10]. Group 3: Policy Risk Premium - The policy risk premium for Chinese assets is decreasing, while it is rising for US assets due to concerns over the independence of the US Federal Reserve [10]. - The ongoing geopolitical tensions and the potential for a more stable RMB asset environment are contributing to a long-term reduction in China's sovereign risk premium [10]. Group 4: Purchasing Power Parity - The RMB is currently undervalued against the USD based on purchasing power parity (PPP), with the IMF indicating that 1 USD's purchasing power is equivalent to approximately 3.4 RMB [12]. - The long-standing undervaluation is attributed to limited capital account openness and concerns over China's economic transition risks, but the door for RMB revaluation is opening [12]. Group 5: Catalysts for RMB Appreciation - The central bank's midpoint rate has been set unusually strong, indicating an official expectation for RMB appreciation [18]. - Recent reports suggest the potential introduction of a RMB stablecoin, which could enhance the internationalization of the RMB and increase its attractiveness for foreign investment [20]. - Foreign capital is increasingly entering the A-share market, with significant inflows observed in August, driven by a shift in sentiment from trading to investing in Chinese assets [24]. - Export companies are accelerating their currency conversion as the cost of holding USD rises, contributing to RMB appreciation [25]. Group 6: Market Outlook - The weak dollar environment is expected to continue supporting RMB appreciation, although factors such as declining export expectations and the need for domestic demand recovery may influence the pace of appreciation [28].

Exchange Rate Trends - The RMB/USD exchange rate has shown a fluctuating upward trend since the beginning of the year, with a slight appreciation in early 2023 due to a weaker dollar, followed by a rapid depreciation in April due to tariff concerns, and a return to appreciation from May onwards[2] - As of late August, the RMB has entered a strong appreciation phase, with the onshore and offshore rates converging towards the 7.0 level, indicating support from both fundamental and policy factors[2][5] Key Drivers of RMB Appreciation - The narrowing of the China-US 10-year Treasury yield spread by nearly 50 basis points over the past three months has provided a basis for recent RMB appreciation, driven by a mild increase in China's risk-free interest rates and a decline in US Treasury yields[7] - Changes in policy risk premiums have favored the RMB, as rising uncertainty in US fiscal and monetary policies contrasts with China's efforts to reduce sovereign risk premiums through reforms[6][14] - The long-standing undervaluation of the RMB is changing, with IMF data indicating that 1 USD has a purchasing power equivalent to 3.4 RMB, suggesting the current exchange rate is undervalued by over 50%[17][20] Catalysts for Recent Appreciation - The People's Bank of China (PBOC) has released strong appreciation expectations through its midpoint rate, influenced by geopolitical negotiations and domestic stability considerations[3][31] - The bullish trend in the A-share market, with the Shanghai Composite Index rising over 8% and the ChiNext Index over 20% in August, has led to increased foreign investment and demand for RMB[40] Future Outlook - The weak dollar environment is expected to continue supporting RMB appreciation, but factors such as weak export expectations and the need for domestic demand recovery suggest a stable appreciation pace is more beneficial for fundamental recovery[47] - The importance of the RMB against a basket of currencies is anticipated to rise, reflecting the need for a more balanced exchange rate strategy[49]