【TMGM Financial Recap】Renminbi Hits Four-Year High as Dollar Gains: Why Are Their Drivers So Different?

The renminbi strengthened alongside the dollar on October 19, with its central parity rate rising by 12 basis points from the previous day to 6.7208. It was the third successive upward adjustment on a business day. By late New York trading that day, the onshore renminbi was at 6.6810, while its offshore counterpart traded at 6.6822. Year to date, appreciation stood at 4.38% for the central parity rate, 4.35% for the onshore spot rate and more than 4.1% for the offshore rate. The dollar, too, advanced: after regaining 102 during the session, the US Dollar Index finished 0.14% higher at 101.98.

Only six currencies make up the US Dollar Index basket, with the euro carrying a 57.6% weighting. That share is fixed under the index methodology, not estimated. The remaining weights are 13.6% for the Japanese yen, 11.9% for the British pound, 9.1% for the Canadian dollar, 4.2% for the Swedish krona and 3.6% for the Swiss franc. Trading on October 19 saw the euro lose 0.19% to 1.1212 and the yen slip 0.30% to 158.52. The pound fell 0.10%, while the Swiss franc shed 0.28%. Only the Canadian dollar moved the other way, advancing 0.33%. Applying the respective weights to these changes produces contributions of 0.11 percentage points from the euro, 0.04 percentage points from the yen and 0.01 percentage points from the Swiss franc. The Canadian dollar, by contrast, deducted 0.03 percentage points. Across all six currencies, the combined contribution was 0.14 percentage points, precisely accounting for the dollar index’s advance that day. Pressure on the euro also came from the eurozone bond market. As France’s 10-year government bond yield climbed 15 basis points to 4.93%, the French-German yield spread expanded to 146 basis points and French sovereign CDS reached a multiyear high. Outflows from French government bonds were dragging the euro down as well.

Why Are Dollar Conversions Strengthening the Renminbi?

Europe accounted for the dollar’s 0.14% advance, but a separate driver supported the renminbi. Exports in September totalled US$447.18 billion, a year-on-year increase of 36.3%. The monthly trade surplus, meanwhile, rose from US$119.1 billion in August to US$133.53 billion.

To meet wage bills, tax payments and loan repayments, exporters must exchange the dollars they receive for renminbi. Banks reported a foreign exchange settlement and sales surplus of US$337.9 billion between January and August, against US$12.1 billion in the corresponding period last year. Over seven months, that represents more than US$300 billion in additional money, which eventually reaches the interbank market. Working against these flows, however, are interest rate differentials.

At 1.647%, China’s 10-year government bond yield is 349 basis points below the US 10-year Treasury yield of 5.141%. Investors holding renminbi assets therefore earn 3.49 percentage points less in annual interest. Factoring in currency movements changes that comparison. A foreign investor purchasing 10-year Chinese government bonds receives a coupon of 1.647%, alongside this year’s 4.38% appreciation in the renminbi’s central parity rate. Adding those figures produces 6.03%, exceeding the corresponding US 10-year Treasury yield of 5.141%. Although this rough calculation leaves out hedging costs, its implication is clear: a short-renminbi position based solely on the 349-basis-point differential has lost money this year.

The offshore renminbi traded at 6.6822 on October 19, placing it 12 pips below the onshore rate of 6.6810. Dollar conversions into renminbi offshore therefore secured a less favourable rate, indicating that domestic dollar conversions were the source of upward pressure.

For nearly a year, these opposing forces have competed, but dollar conversions have prevailed this year. According to CITIC Securities, expectations for the exchange rate turned from depreciation to appreciation at the end of 2025, prompting exporters to convert more dollars. This substantially reduced the correlation between the exchange rate and the China-US interest rate differential. As dollar conversions lift the renminbi, companies still holding dollars become increasingly anxious: each day of delay leaves them receiving fewer renminbi when they convert. The process can gather momentum by itself until companies have exchanged most of their dollar holdings.

Has the Central Parity Rate Been Driving Renminbi Gains?

Two phrases appeared together in the statement issued after the Monetary Policy Committee’s third-quarter meeting: “uphold the decisive role of the market in exchange rate formation” and “guard against herd behavior and the self-reinforcement of irrational expectations.” In the central bank’s own assessment, the renminbi has gained around 9% against the dollar since 2025. Its position is that there is “neither a need nor an intention to gain a competitive trade advantage through currency depreciation.”

Dollar pricing for crude oil, iron ore and soybeans means that each percentage point of currency appreciation lowers procurement costs by one percentage point. Against a 6.3% year-on-year rise in September’s PPI, slightly less expensive imported raw materials offer downstream businesses some relief. The effect on exporters is the reverse. An exchange rate shift from 7.0 to 6.8 cuts the renminbi proceeds from a US$1 million order by RMB200,000. Net profit margins at small and medium-sized exporters are often below 5%, so this one currency move can erase more than half a year’s profit. In September, dollar-denominated exports expanded 36.3%, while the renminbi gained 4.35% over the corresponding period. Even after offsetting the currency gain, exporters’ renminbi revenue growth remains above 30%. The impact of appreciation so far has therefore been on profit margins rather than orders. The closing section of the third-quarter meeting statement retained the commitment to “keep the renminbi exchange rate basically stable at a reasonable and balanced level”.

How Much Further Could the Renminbi Strengthen?

A level of 6.40 within a year is the figure put forward by Goldman Sachs’ Kamakshya Trivedi, whose calculations indicate that the renminbi is currently undervalued by 20% to 25%. For CITIC Securities, the rationale rests on the trade surplus’s composition. Non-AI goods have driven this year’s surplus growth, and global manufacturing conditions have seen no significant change, keeping the renminbi’s underlying support intact.

At the heart of the disagreement is a common question: how many dollars remain in companies’ hands? Conversions between January and August already amounted to US$337.9 billion, yet no comprehensive public figure captures the remaining pool. Foreign exchange settlement and sales statistics do not cover the share of dollar receipts exporters retain, dollar deposits at overseas subsidiaries or outstanding receivables. Were September’s pace of US$133.53 billion to continue, roughly another US$400 billion in trade surplus would have to be dealt with during the fourth quarter. That projection depends on a single assumption: exports do not accelerate further or decline.

The dollar presents a further variable. Should the latest French turmoil persist through the budget vote, with European capital continuing to move into dollar assets, a stronger US Dollar Index would constrain the renminbi’s scope for appreciation. Both currencies were able to rise on October 19 because separate forces supported them: European fiscal risks drove one, while domestic demand to exchange dollar receipts for renminbi drove the other. That premise would cease to apply if Europe’s flight to safety broadened into a global dollar shortage.