Core Viewpoint - The discussion around whether the RMB/USD exchange rate will break the "7" level is increasing, with analysts suggesting that multiple factors will influence this outcome, including the China-US interest rate differential, the willingness of holders to convert currency, and the RMB central parity rate. Overall, the probability of breaking 7 in the short term is considered low [2][3][4]. Group 1: Exchange Rate Trends - In the last week of August, the RMB appreciated significantly against the USD, reaching a high of 7.1260 on August 29, the highest since November of the previous year. Despite a slight pullback in September, the RMB has appreciated over 2100 points, or nearly 3%, from its low of 7.3506 in early April [2][3]. - The RMB's performance in 2023 has been volatile, with initial appreciation in a weak USD environment, followed by depreciation due to concerns over global trade after the announcement of US tariffs in April, and subsequent recovery after high-level China-US economic meetings [2][3]. Group 2: Influencing Factors - The recent rapid appreciation of the RMB is attributed to a combination of the Federal Reserve's policy shift, domestic policy guidance, and market sentiment. The Fed's hints at potential interest rate cuts have created a favorable external environment for RMB appreciation [3][4]. - The RMB's exchange rate against a basket of currencies has shown a decline of 4.8% since the end of last year, with the CFETS RMB exchange rate index reported at 96.57 on August 29 [3][4]. Group 3: Interest Rate Differential and Market Sentiment - The interest rate differential between China and the US has narrowed significantly, with the 10-year Chinese bond yield rising over 20 basis points since June, while the US bond yield has decreased from 4.5% to around 4.2%. This has led to a reduction in the nominal interest rate differential by nearly 50 basis points [5]. - Analysts suggest that while a weak USD environment supports RMB appreciation, factors such as weak export expectations and the need for domestic demand recovery will require a steady pace of appreciation [5]. Group 4: Currency Conversion Willingness - The willingness of currency holders to convert is a critical factor, with expectations of "panic conversion" among export enterprises potentially driving the offshore RMB above 7.0 in late 2024. However, analysts believe that the likelihood of such panic conversion is low due to increased hedging by exporters [5][6]. Group 5: Central Bank's Role - The central parity rate of the RMB is a significant variable, with analysts suggesting that the People's Bank of China may adopt a gradual approach to adjusting the central parity rate to avoid excessive volatility in the stock and currency markets [7]. - The central bank's management of the RMB's central parity rate will be crucial in determining the exchange rate's trajectory, with a focus on maintaining market autonomy while preventing excessive appreciation expectations [7].