【TMGM Financial Recap】Renminbi Reaches Four-Year High as the Dollar Also Strengthens! But Their Driving Forces Are Completely Different

On October 19, the renminbi’s central parity rate was set at 6.7208, strengthening by 12 basis points from the previous day. This marked its third consecutive upward adjustment on a business day. In late New York trading that day, the onshore renminbi stood at 6.6810 and the offshore renminbi at 6.6822. Since the start of the year, the central parity rate has appreciated by 4.38%, the onshore spot rate by 4.35%, and the offshore rate by more than 4.1%. The dollar was also moving higher. The US Dollar Index closed at 101.98, up 0.14%, after reclaiming 102 during the session.

The US Dollar Index basket contains only six currencies. The euro has a weight of 57.6%, a fixed figure specified in the index methodology rather than an estimate; the Japanese yen accounts for 13.6%, the British pound 11.9%, the Canadian dollar 9.1%, the Swedish krona 4.2%, and the Swiss franc 3.6%. On October 19, the euro fell 0.19% to 1.1212, the yen weakened 0.30% to 158.52, the pound declined 0.10%, and the Swiss franc dropped 0.28%. The Canadian dollar was the only currency moving in the opposite direction, gaining 0.33%. Multiplying these movements by their respective weights gives a contribution of 0.11 percentage points from the euro, 0.04 percentage points from the yen, and 0.01 percentage points from the Swiss franc, while the Canadian dollar subtracted 0.03 percentage points. Together, the six currencies contributed 0.14 percentage points, exactly matching the dollar index’s gain that day. Meanwhile, developments in the eurozone bond market were also weighing on the euro. France’s 10-year government bond yield rose 15 basis points to 4.93%, the French-German yield spread widened to 146 basis points, and French sovereign CDS climbed to a multiyear high. Capital was flowing out of French government bonds, taking the euro lower with it.

The Renminbi’s Strength Comes from Dollar Conversions

The dollar’s 0.14% gain was driven by Europe. A different force was at work on the renminbi side. September exports reached US$447.18 billion, up 36.3% year on year, while the monthly trade surplus stood at US$133.53 billion, compared with US$119.1 billion in August.

Exporters receive dollars, which they need to convert into renminbi to pay wages, taxes, and loans. From January to August, banks recorded a foreign exchange settlement and sales surplus of US$337.9 billion, compared with US$12.1 billion in the same period last year. That is more than US$300 billion extra over seven months, and this money ultimately flows into the interbank market. Interest rate differentials, however, are pulling in the opposite direction.

China’s 10-year government bond yield stands at 1.647%, versus 5.141% for the US 10-year Treasury, a gap of 349 basis points. Holding renminbi assets means earning 3.49 percentage points less in annual interest. Once exchange rate movements are included, however, the calculation changes. For a foreign investor buying 10-year Chinese government bonds, the coupon is 1.647%, while the renminbi’s central parity rate has appreciated by 4.38% this year. Simply adding the two gives 6.03%, higher than the corresponding US 10-year Treasury yield of 5.141%. This is a rough calculation that excludes hedging costs, but the direction is clear: shorting the renminbi solely on the basis of that 349-basis-point gap has been a losing trade this year.

On October 19, the offshore renminbi was 12 pips weaker than the onshore rate, at 6.6822 versus 6.6810. Converting dollars into renminbi in the offshore market actually fetched a less favorable rate, suggesting that the upward pressure was coming from domestic dollar conversions.

These two forces have been pulling against each other for nearly a year, with dollar conversions gaining the upper hand this year. CITIC Securities believes that after exchange rate expectations shifted from depreciation to appreciation at the end of 2025, exporters increased their dollar conversions, significantly weakening the correlation between the exchange rate and the China-US interest rate differential. Dollar conversions push the renminbi higher, and a stronger renminbi, in turn, makes companies that have yet to convert their dollars more anxious: every additional day they wait means receiving fewer renminbi for those dollars. This cycle can accelerate on its own until companies have converted most of their dollar holdings.

The Central Parity Rate Has Not Been Pushing the Renminbi Higher

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

Crude oil, iron ore, and soybeans are priced in dollars. Every percentage point of currency appreciation reduces procurement costs by one percentage point. With September’s PPI rising 6.3% year on year, slightly cheaper imported raw materials provide a cushion for downstream businesses. Exporters face the other side of the equation. For a US$1 million order, a move in the exchange rate from 7.0 to 6.8 means receiving RMB200,000 less. Small and medium-sized exporters often have net profit margins below 5%, and this single exchange rate move can wipe out more than half a year’s profit. September exports grew 36.3% in dollar terms, while the renminbi appreciated 4.35% over the corresponding period. Offsetting the two still leaves growth in exporters’ renminbi revenue above 30%. So far, appreciation has been squeezing profit margins rather than orders. At the end of the third-quarter meeting statement, the commitment to “keep the renminbi exchange rate basically stable at a reasonable and balanced level” remained in place.

How Far Can the Renminbi Appreciate?

Goldman Sachs’ Kamakshya Trivedi offered a number: 6.40 within a year. His calculations suggest that the currency is currently undervalued by 20% to 25%. CITIC Securities bases its reasoning on the composition of the trade surplus: this year’s surplus growth has come from non-AI goods, while conditions in global manufacturing have not changed significantly, leaving the foundations supporting the renminbi intact.

The disagreement centers on the same question: how many dollars do companies still hold? US$337.9 billion was already converted from January to August, but there is no complete public figure showing how much remains in the pool. The proportion of dollar receipts retained by exporters, dollar deposits held by overseas subsidiaries, and outstanding receivables all fall outside the scope of foreign exchange settlement and sales statistics. At September’s pace of US$133.53 billion, approximately another US$400 billion in trade surplus would need to be dealt with in the fourth quarter. This projection rests on just one assumption: exports neither accelerate further nor decline.

Another variable lies on the dollar side. If the latest turmoil in France continues through the budget vote, and European capital keeps shifting into dollar assets, a rising US Dollar Index would limit the renminbi’s room to appreciate. On October 19, both currencies could strengthen simultaneously because their driving forces were different: one came from fiscal risks in Europe, the other from domestic demand to convert dollar receipts into renminbi. If Europe’s flight to safety spreads into a global dollar shortage, that premise will no longer hold.