1. Report Industry Investment Rating - Not provided in the content 2. Core Viewpoints of the Report - China's foreign exchange reform has gradually established a dynamic equilibrium exchange rate system that emphasizes both market - led pricing and macro - prudential management through a series of reforms from 2015 to 2022 [14] - The RMB exchange rate is affected by international payments, interest rate parity, and relative economic strength. When these three factors are in the same direction, it is more likely to form a trend of appreciation [194] - The offshore RMB market's liquidity is supported by cross - border trade settlement for long - term growth and central bank support and market financing for short - term stability [87] 3. Summary by Relevant Catalogs 3.1 Foreign Exchange Reform - China's foreign exchange reform includes the improvement of the mid - price mechanism in 2015, the introduction of the counter - cyclical factor in 2017, the dynamic adjustment of cross - border financing macro - prudential parameters in 2019, and the strengthening of the foreign exchange risk reserve system in 2022 [14] - The mid - price mechanism combines the previous day's closing price and the change of a basket of currencies, which makes the mid - price close to the market and takes into account external stability [21] - The counter - cyclical factor guides market rational expectations, weakens the self - reinforcement mechanism of pro - cyclical behavior, and enhances the resilience and stability of the exchange rate mechanism [24] - Since the launch of the LPR reform in August 2019, the loan quotation mechanism has become more market - oriented, breaking the "implicit lower limit" of loan interest rates [27] - The adjustment of cross - border financing macro - prudential parameters aims to increase cross - border financing quotas, relieve RMB depreciation pressure, and optimize the asset - liability structure of domestic entities [32] 3.2 Domestic RMB Foreign Exchange Market - The RMB foreign exchange market is divided into the bank - to - customer market and the inter - bank market. The inter - bank market has high liquidity and large trading volume [41] - The inter - bank foreign exchange derivatives market has developed since 2005, with swap transactions being the most important trading method [62] - In the spot market, the willingness of enterprises to settle foreign exchange has weakened, and the demand for purchasing foreign exchange has increased. In the forward market, enterprises tend to lock in the cost of purchasing foreign exchange in advance [66] - Short - term foreign exchange derivatives dominate the market, mainly meeting the short - term foreign exchange capital allocation and risk management needs of banks and enterprises [81] 3.3 Offshore RMB Market - The long - term liquidity of the offshore RMB market is mainly supplied by cross - border trade settlement, and the short - term liquidity is obtained through market financing and official support [87] - The offshore RMB market has various products, including CNH spot, RMB offshore non - deliverable forward, RMB offshore deliverable forward, RMB futures, and RMB futures options [94] - The participants in the offshore RMB market are diversified, and the proportion of non - financial institutional investors has increased, narrowing the gap between the offshore and onshore exchange rates [101] 3.4 QFII, RQFII, and QDII - QFII and RQFII systems have been gradually liberalized, allowing foreign institutional investors to invest in the Chinese domestic capital market. The two systems have been unified [106] - The QDII system allows domestic institutional investors to invest overseas, and its investment scope and scale have been gradually expanded [108] 3.5 RMB Internationalization - RMB internationalization has gone through three stages: using trade settlement as a breakthrough, accelerating investment and financial opening, and enhancing global influence [112] - To promote RMB internationalization, China has promoted RMB pricing in commodities, expanded the opening of the domestic financial market, and strengthened RMB settlement in neighboring and "Belt and Road" countries [122] 3.6 SWIFT and CIPS - SWIFT is the most important cross - border payment system globally, but the increasing use of financial sanctions by the US has made the international community aware of the risks of the US - dollar - dominated system. CIPS is playing an increasingly important role in RMB cross - border settlement [127] - In 2024, CIPS handled a large number of RMB cross - border payment transactions, and the RMB's share in global payments has increased, ranking fourth [132] 3.7 RMB Exchange Rate Analysis - Short - term RMB exchange rate trends are determined by capital supply and demand, market expectations, and policy and external environments [140] - The issuance of offshore central bank bills affects the supply and demand of offshore RMB, and the swap point reflects market expectations for the RMB [169] - The RMB exchange rate is affected by international payments, interest rate parity, and relative economic strength. When these factors are in the same direction, it is beneficial for the RMB exchange rate [194] - The international balance of payments affects the RMB exchange rate. Trade surpluses lead to RMB appreciation, and capital outflows lead to RMB depreciation [195] - Interest rate parity affects capital flow. When the RMB interest rate is higher than the US dollar interest rate, it supports the RMB; otherwise, the RMB is under pressure [195] - Relative economic strength affects market expectations. When China's economic prospects are better than the US, the RMB has the potential to appreciate [197]