1. Report Industry Investment Rating No information provided in the report. 2. Core Viewpoints of the Report - The impact of RMB exchange rate on narrow - liquidity may be more about price rather than quantity. The central bank's attitude towards the rapid appreciation of the RMB may lead to a downward revision of the central bank's desired level of repo rates such as R007 [1][4][13] - Under the combined effect of RMB appreciation, central bank support, and neutral credit, the inter - bank liquidity may continue to be loose, but the equilibrium position of R007 may still be at 1.5, and the extremely low certificate of deposit spreads and credit spreads will continue [4][17] 3. Summary According to the Directory 3.1 RMB Exchange Rate's Impact on Narrow - Liquidity - On February 27, 2026, the central bank announced that starting from March 2, 2026, it would lower the foreign exchange risk reserve ratio for forward foreign exchange sales business from 20% to 0. Since the beginning of 2026, the RMB has continued to appreciate, and the appreciation rate has increased. The on - shore and off - shore RMB spreads have also continued to converge [2][11] - The one - sided movement of the RMB shows the resilience of the Chinese economy but also amplifies the short - term over - appreciation risk. The central bank's reduction of the foreign exchange risk reserve ratio often works in conjunction with positive efforts of the counter - cyclical factor and low repo rates. Preventing the short - term rapid appreciation of the RMB is the current policy focus of the central bank [3][12] - The market generally understands the impact mechanism of the RMB exchange rate on narrow - liquidity from the perspective of "quantity", but the report believes that "price" (the central bank's desired level of repo rates) is a more reasonable perspective. In January 2026, the month - on - month increase in the foreign exchange position item of the central bank's balance sheet was 53.1 billion yuan, which was negligible compared with the inter - bank excess reserves. When the exchange rate depreciation pressure is high, the counter - cyclical factor is significantly negative, the RMB liquidity in Hong Kong tightens, and the inter - bank repo rate (represented by R007) rises significantly [4][13] 3.2 Bond Spreads Related to the Funding Situation - The cash withdrawal rhythm of commercial banks is relatively fast, and under the combined effect of RMB appreciation, central bank support, and neutral credit, the inter - bank liquidity may continue to be loose, and the extremely low certificate of deposit spreads and credit spreads will continue [4][14][17] 3.3 Narrow - Liquidity 3.3.1 Central Bank Operations - Short - term liquidity: The central bank conducts "peak - shaving and valley - filling" operations. From February 24 to February 28, the net injection of pledged reverse repurchase was - 61.14 billion yuan. Medium - and long - term liquidity: MLF and outright reverse repurchases continue to have a net injection [18] 3.3.2 Institutional Lending and Borrowing Situations - The supply of funds (lenders) is at a seasonal high, and the demand for funds (borrowers) has a high absolute financing balance and a relatively low leverage ratio [24][33] 3.3.3 Repo Market Transaction Situations - The volume of funds is large and the price is stable, and the capital sentiment index continues to be loose [43][45] 3.3.4 Interest Rate Swaps - Interest rate swaps are fluctuating downward, with a slight decline in the cost of interest rate swaps, and the spread between CDs and IRS continues to be low [50][52] 3.4 Government Bonds 3.4.1 Next - Week Government Bond Net Payment - Past week: The total issuance of government bonds (treasury bonds + local government bonds) was 68.14 billion yuan, and the net payment was 19.04 billion yuan. Next week: The total issuance is expected to be 23.75 billion yuan, and the net payment is expected to be 14.10 billion yuan [55] 3.4.2 Government Bond Maturity Structure - As of February 27, the issuance of ultra - long - term bonds with a maturity of more than 10 years and the issuance maturity structures of treasury bonds and local government bonds in 2024, 2025, and 2026 are presented [56][59][60] 3.5 Certificates of Deposit (CDs) 3.5.1 Absolute Yield - The absolute yield of CDs is basically flat, and the yield curve of CDs has declined overall compared with before the Spring Festival holiday [61][62] 3.5.2 Issuance and Outstanding Situations - As of February 27, the issuance and outstanding balance structures of CDs of different types of banks are presented, including the issuance and balance proportions of different maturities [66][67] 3.5.3 Relative Valuation - Relevant spread analysis of CDs shows the spreads between CDs and R007, DR007, and 10 - year treasury bonds and their quantiles since 2020 [69]

Group 1: Policy Changes - The People's Bank of China will lower the foreign exchange risk reserve ratio for forward foreign exchange sales from 20% to 0% effective March 2, 2026[1] - This adjustment aims to support enterprises in managing exchange rate risks and promote the development of the foreign exchange market[1] Group 2: Market Reactions - The recent acceleration of the RMB appreciation has been significant, with an average daily appreciation of 239 pips from February 24 to 26, compared to only 31.7 pips in December[3] - The shadow of the counter-cyclical factor reached a new high of 610 pips on February 26, indicating the central bank's determination to curb excessive appreciation volatility[3] Group 3: Cost Implications for Banks - The reduction in the risk reserve ratio means banks will save approximately $0.72 in borrowing costs for every $100 in forward foreign exchange sales, translating to a cost reduction of about 0.72%[7] - If banks pass on these savings to enterprises, it could result in a reduction of around 493 pips in the RMB exchange rate cost for every $1 of forward purchases[7] Group 4: Historical Context - Historically, the central bank has adjusted the forward foreign exchange risk reserve ratio five times, with mixed effects on market sentiment and no long-term trend changes observed[8] - The adjustments have typically only had short-term impacts on market emotions, failing to alter long-term trends[8] Group 5: Future Outlook - The current rapid appreciation of the RMB is deemed unsustainable, with core factors such as strong exports needing to support a stable appreciation trend[10] - External factors, including the lack of a sustained weakening trend for the USD, suggest that the RMB's appreciation may face challenges ahead[10]

Core Viewpoint - The People's Bank of China (PBOC) has decided to lower the foreign exchange risk reserve ratio for forward foreign exchange sales from 20% to 0% starting March 2, 2026, to support the development of the foreign exchange market and help enterprises manage exchange rate risks. This move reflects the central bank's determination to curb excessive fluctuations in the appreciation of the Renminbi (RMB) amid recent rapid appreciation [2][4]. Group 1: Background of Policy Adjustment - The recent rapid appreciation of the RMB has been significantly influenced by short-term factors, including seasonal export surges and the release of accumulated foreign exchange settlements. The average daily appreciation from February 24 to 26 was 239 pips, compared to only 31.7 pips in the previous months [6][14]. - The shadow of the counter-cyclical factor has increased, reaching a new high of 610 pips on February 26, indicating the central bank's commitment to controlling excessive appreciation [6][14]. Group 2: Understanding the Forward Foreign Exchange Risk Reserve Ratio - The forward foreign exchange risk reserve is a macro-prudential reserve ratio imposed by the central bank on banks conducting forward foreign exchange sales on behalf of clients. It aims to adjust the cost of banks engaging in forward foreign exchange transactions and suppress pro-cyclical behavior in the foreign exchange market [7][16]. Group 3: Impact Mechanism of the Reserve Ratio - Increasing the risk reserve ratio raises the cost for banks to engage in forward foreign exchange sales, which is typically passed on to enterprises, thereby suppressing their demand for forward purchases in response to depreciation pressure. Conversely, lowering the ratio reduces costs and encourages enterprises to purchase foreign exchange to counter appreciation pressure [8][18]. Group 4: Linkage Between Forward and Spot Markets - Adjustments to the forward foreign exchange risk reserve ratio directly affect the pricing in the forward foreign exchange market, which in turn influences the spot exchange rate. A strong demand for forward purchases leads to increased spot purchases by banks, potentially causing the RMB to depreciate, while a decrease in demand can lead to appreciation [9][20]. Group 5: Cost Impact on Banks - The reduction of the risk reserve ratio from 20% to 0% means banks no longer need to deposit an additional 20% for every $100 in forward transactions. This change saves banks approximately $0.72 in borrowing costs per transaction, translating to a potential savings of about 493 pips for enterprises per dollar in forward purchases if banks pass on the savings [10][23]. Group 6: Historical Review of Policy Adjustments - Historically, the PBOC has adjusted the forward foreign exchange risk reserve ratio five times, with each adjustment having short-term effects on market sentiment but not altering long-term trends. The adjustments have been made in response to both depreciation and appreciation pressures [11][24]. Group 7: Central Bank's Policy Toolbox - The PBOC has a variety of tools at its disposal for exchange rate regulation, including adjustments to the foreign exchange reserve ratio and macro-prudential parameters. The recent reduction in the risk reserve ratio is one of the measures, with potential further actions including increasing the foreign exchange reserve ratio to reduce supply [12][27]. Group 8: Future Outlook on Exchange Rates - The current rapid appreciation of the RMB is deemed unsustainable, with core factors such as strong exports and improving domestic fundamentals being crucial for maintaining a stable appreciation trend. The outlook suggests that while medium-term appreciation is likely, short-term rapid appreciation may not continue due to the fading of temporary factors and policy measures to control excessive fluctuations [13][28][30].

Core Viewpoint - The article discusses the global asset performance in January 2026, highlighting that commodities outperformed global stocks, bonds, and currencies, with commodities at 9.06%, global stocks at 3.02%, global bonds at 0.94%, the Renminbi at 0.46%, and the US dollar at -1.35% [2]. Group 1: Global Asset Overview - Kevin Walsh's nomination by Trump as Fed Chair may indicate a significant policy shift, advocating for a restructuring of the Fed's $6.6 trillion balance sheet and a new agreement with the Treasury to reduce the Fed's market influence [4][11]. - The US dollar index rebounded after hitting a low on January 27, driven by expectations of tighter monetary policy, while US stocks and gold experienced volatility due to these tightening expectations [4][11]. - The implied volatility skew of US Treasury options has been rising since mid-October 2025, indicating that bond investors perceive inflation risks to be greater than recession risks, leading them to pay higher premiums for hedging against rising interest rates [5][17]. Group 2: Market Sentiment and Trends - Global fund manager sentiment reached its highest level since July 2021, with the sentiment composite indicator rising from 7.3 to 8.1, and cash levels among fund managers dropping to a new low of 3.2% [6][22]. - The 40-year Japanese government bond yield hit 4.0% in January 2026, raising concerns about Japan's debt amid fears that a large economic stimulus plan would worsen inflation and debt burdens [7][25]. - Growth stocks are showing excess returns correlated with overall market trends, suggesting that as the market maintains an optimistic outlook, funds may shift from defensive to growth sectors [8][26]. Group 3: Global Market Vulnerabilities - The liquidity in the Japanese government bond market has deteriorated significantly, with the Bloomberg liquidity index for Japanese bonds reaching 9.36, indicating a fragile link in the global interest rate system [9][29]. - The copper-to-oil ratio is rising, which may indicate improving industrial activity in China, potentially benefiting the CSI 300 index as it leads the index by about six months [10][32]. - Concerns over geopolitical tensions have emerged as a significant tail risk, with a notable percentage of fund managers identifying it as a primary concern in early 2026 [11][50]. Group 4: Currency and Precious Metals - Trump's interest in Greenland has accelerated the rise in gold and other precious metal prices, with gold prices increasing over 35% from November 2025 to January 28, 2026, despite a recent pullback due to Walsh's nomination [12][36]. - The Renminbi is experiencing upward pressure, with the USD/CNY exchange rate falling by 0.58% in January 2026, reflecting a shift in market sentiment towards Chinese assets [13][40].

Group 1 - The report highlights that the US inflation data for December 2025 is in line with expectations, indicating that inflation remains moderate and controllable. The Consumer Price Index (CPI) increased by 2.7% year-on-year, matching the forecast, while the core CPI rose by 2.6% year-on-year, slightly below expectations [5][6][8] - Seasonal demand during the holiday period has led to a slight increase in food and energy service prices, while core inflation was impacted by used car prices. Core service inflation saw a minor uptick due to rising rent prices and holiday travel effects [6][7] - The market is increasingly betting on a dual easing policy in 2026, following the release of the inflation data, with US stocks rising and the dollar index experiencing fluctuations. The Federal Reserve is expected to adopt a wait-and-see approach in January, with a low probability of interest rate cuts [6][8] Group 2 - The report discusses the recent trends in the Chinese yuan (RMB) following its depreciation past the 7 mark. The central bank's intervention through counter-cyclical measures has been noted as a significant factor in stabilizing the RMB exchange rate [11][12] - The report estimates that the current foreign trade settlement backlog is approximately $480 billion, with a significant portion attributed to the 2024 backlog. The holding cost for enterprises is projected to rise, indicating a potential shift in settlement behavior if the RMB appreciates beyond 6.80 [12][13] - The report also highlights that foreign capital is gradually stabilizing in the domestic bond market, with a strategic shift towards risk-balanced allocations in RMB assets. The RMB's appreciation is expected to enhance the attractiveness of Chinese assets for foreign investors [14][15] Group 3 - The report outlines recent fiscal policies, including the extension of personal income tax support for residents purchasing new homes, effective from January 1, 2026, to December 31, 2027. This policy aims to stimulate the housing market [16] - The People's Bank of China announced a 900 billion yuan reverse repurchase operation to inject liquidity into the market, indicating ongoing efforts to maintain financial stability [16] - The report notes that the US Producer Price Index (PPI) for November increased by 0.2%, aligning with expectations, reflecting stable inflationary pressures in the manufacturing sector [17]

Core Viewpoint - The article challenges the prevailing notion that the Chinese yuan (RMB) will face intervention against rapid appreciation due to the economy's reliance on exports, arguing that the impact of RMB appreciation on exports is overstated [1] Group 1: Currency Policy and Market Dynamics - The central bank emphasizes the importance of market forces in determining exchange rates, advocating for a managed floating exchange rate system while preventing excessive fluctuations [3] - The central bank aims to manage expectations and prevent extreme capital flows that could destabilize the financial market and economy, highlighting the risks of uncontrolled currency movements [3] - A stable and moderately fluctuating exchange rate is deemed essential for enhancing the RMB's attractiveness as a currency for pricing, settlement, and reserves [3] Group 2: Exchange Rate Mechanism - The People's Bank of China (PBOC) authorizes the foreign exchange trading center to publish the daily midpoint for the RMB against major currencies, allowing for fluctuations within a set range [5] - The midpoint is calculated based on market maker quotes, previous closing prices, and a basket of currencies, with a counter-cyclical factor used to correct market-driven volatility [5] - Since April 2025, the RMB midpoint has steadily appreciated, signaling a clear intention to stabilize exchange rate expectations despite a stronger USD in July and October [5] Group 3: Cross-Border Financing and Future Outlook - Recent adjustments to macro-prudential parameters for cross-border financing have increased limits, alleviating depreciation pressure on the RMB [7] - The central bank issued offshore RMB bills in Hong Kong to tighten offshore liquidity and prevent excessive depreciation [7] - The outlook for 2026 suggests that the RMB is unlikely to experience significant unilateral appreciation or depreciation, with expectations leaning towards "two-way fluctuations with a stronger central tendency" [7]

External Factors - The primary driver for the RMB appreciation in 2025 is the weakening of the USD, which has declined by nearly 10% this year due to three rate cuts by the Federal Reserve[1] - The USD index fell to around 97 in December after failing to break the 100 resistance level, confirming a downward trend[19] - The expected mild depreciation of the USD is projected to be around 3% in 2026, with a "low first, high later" pattern anticipated[24] Internal Factors - The internal economic and policy environment in China is stabilizing, contributing to the RMB's appreciation[1] - China's exports have shown robust growth, exceeding expectations, particularly after tariff adjustments, leading to a steady appreciation channel for the USD/CNY exchange rate[14] - The internal economic surprise indices for both China and the US are trending downward, indicating limited support for the RMB from internal factors in the short term[27] Supply and Demand Factors - The supply and demand dynamics have not fully played out this year, with a decrease in market settlement willingness under a strong dollar environment[16] - Seasonal increases in foreign income in December may lead to higher settlement rates, potentially supporting RMB appreciation[21] - The rising implied volatility of the RMB and the risk reversal options favoring RMB appreciation indicate a market expectation of a wider trading range for the currency[27] Market Implications - The RMB's appreciation is expected to benefit foreign capital inflows into A-shares and Hong Kong stocks, favoring quality and growth styles[32] - The report emphasizes that the stock market's performance and fundamental improvements are more likely to drive RMB appreciation rather than the exchange rate itself influencing the stock market[32]

Core Viewpoint - The article focuses on the recent appreciation of the Renminbi (RMB) and challenges the prevailing narrative that links the Federal Reserve's interest rate cuts to RMB appreciation and subsequent damage to export competitiveness [2][3]. Group 1: Current RMB Exchange Rate Narrative - The popular narrative suggests that the Federal Reserve's likely interest rate cuts will lead to a weaker USD, thus causing the RMB to appreciate and harming China's export competitiveness. This narrative is based on several assumptions that require validation [3]. - The relationship between the Federal Reserve's interest rate cuts and the USD's weakness is not necessarily direct, as historical data shows a low correlation between the two [4]. - The assumption that narrowing interest rate differentials between China and the US will lead to RMB appreciation is flawed, as the correlation between funding rate differentials and the USD/CNY exchange rate is weak [5]. Group 2: RMB Appreciation Analysis - The article divides the RMB appreciation observed this year into two phases: the first phase from mid-April to November, driven primarily by policy support, and the second phase from late November to the present, driven by market supply and demand [9][10]. - In the first phase, the RMB middle rate appreciated from 7.21 to 7.08, largely due to policy interventions, while in the second phase, market dynamics took over, leading to a different adjustment mechanism [14]. - Factors contributing to the recent market-driven appreciation include the release of previously held foreign exchange reserves and seasonal trends in net settlement of foreign exchange by enterprises [16]. Group 3: Future Outlook for RMB Exchange Rate - The article anticipates that the RMB will maintain stable fluctuations against the USD through 2026, with limited potential for significant appreciation [17]. - Current valuation metrics indicate that the RMB is reasonably priced, with deviations from expected levels being minimal [18]. - The central bank's policy appears to be aimed at preventing excessive appreciation of the RMB, as indicated by recent trends in the counter-cyclical factor [22]. - The supply-demand dynamics suggest that while there may be short-term volatility, the underlying support for sustained appreciation is not strong enough at this time [24][27]. - External factors, particularly the USD index, are expected to limit the pressure for a prolonged decline in the USD [28]. - Overall, the RMB's future trajectory will depend on complex factors, with a preference for stable two-way fluctuations rather than significant appreciation [29].

Group 1 - The core narrative regarding the recent appreciation of the RMB is linked to the Federal Reserve's interest rate cuts leading to a weaker dollar, which in turn may harm China's export competitiveness [3][16] - The logic of this narrative is questioned, as a Fed rate cut does not necessarily equate to a weaker dollar, and RMB appreciation does not automatically imply a loss of export competitiveness [1][4] - The RMB exchange rate is currently viewed as fairly valued, with no significant overvaluation or undervaluation issues, supported by internal resilience in exports and policy measures [9][42] Group 2 - The narrative surrounding the RMB's appreciation can be divided into two segments: the first driven by policy support from mid-April to November, and the second driven by market supply and demand from late November to the present [8][34] - In the first segment, the RMB middle rate appreciated from approximately 7.21 to around 7.08, with a monthly average appreciation of about 186 basis points [32] - In the second segment, the RMB middle rate further appreciated to just above 7.04, with a notable increase of over 450 basis points in a month, indicating a shift from policy-driven to market-driven appreciation [34][35] Group 3 - Future RMB exchange rate trends will depend on several factors, including valuation factors, policy direction, internal supply and demand, and external responses [42][58] - The valuation perspective indicates that the RMB is not significantly overvalued or undervalued, remaining within a reasonable pricing range [42][43] - The policy direction has shifted from supporting a stable appreciation to preventing excessive appreciation volatility, reflecting a focus on maintaining stability rather than encouraging a one-sided RMB exchange rate trend [45][47] Group 4 - The internal supply and demand dynamics are crucial, with the flow logic indicating that net settlement depends on trade surplus and corporate settlement intentions, while the stock logic highlights the potential release of accumulated foreign exchange positions [51][53] - The accumulated foreign exchange positions, estimated to be between $737 billion and $1.1 trillion, could significantly impact net settlement if released [53][54] - The external response, particularly the behavior of the US dollar, is also a key factor, with expectations that the dollar may not experience sustained weakness due to underlying economic conditions [58][62]

Group 1 - The core narrative is that the Federal Reserve's interest rate cuts lead to a weaker dollar, which in turn causes the renminbi to appreciate, potentially harming export competitiveness [1][3][69] - The logic of this narrative is questioned, as a Fed rate cut does not necessarily equate to a weaker dollar, and an appreciation of the renminbi does not automatically imply a loss of export competitiveness [1][3][69] - The outlook for the renminbi exchange rate suggests that it is currently fairly valued, with no significant overvaluation or undervaluation issues. The internal stability of the renminbi is supported by export resilience and policy support, but substantial upward momentum may require further accumulation [1][3][64] Group 2 - The relationship between the Fed's rate cuts and the dollar's trend is unstable, with a historical correlation coefficient of only 0.04 between Fed rate adjustments and dollar index movements since October 1982 [4][15][70] - The convergence of interest rate differentials between China and the U.S. has shown a strong correlation with the renminbi's appreciation, with a correlation coefficient of 0.88 since January 2022 [5][18][71] - The assertion that renminbi appreciation harms export competitiveness is not strongly supported, as only the real exchange rate shows a potential impact on exports, while nominal rates do not correlate with export performance [6][21][72] Group 3 - The renminbi's appreciation this year can be divided into two phases: the first phase from mid-April to November, driven primarily by policy support, and the second phase from late November to the present, driven by market supply and demand [7][25][73] - In the first phase, the renminbi's central parity appreciated from approximately 7.21 to around 7.08, with a monthly average appreciation of about 186 basis points [29][31] - In the second phase, the renminbi's central parity further appreciated to just above 7.04, with a significant increase in market-driven factors influencing this change [31][32] Group 4 - Future exchange rate trends will be influenced by four key factors: valuation factors, policy orientation, internal supply and demand, and external responses [39][74] - The valuation of the renminbi is currently within a reasonable range, with deviations from the "value center" being only 0% to 2% [39][74] - The policy orientation has shifted from supporting a stable appreciation of the renminbi to preventing excessive appreciation volatility, indicating a focus on maintaining stability rather than encouraging a one-sided market trend [42][75]