RMB Appreciation Cycle Initiated? 2025-2026 Exchange Rate Strategy and HKD Benchmark Analysis

The New Appreciation Cycle Begins, Renminbi Turnaround

Since 2025, the evolution of the renminbi exchange rate has been a bright spot. After ending a three-year downward trend, the USD to RMB exchange rate has begun to show new momentum. From the volatility at the start of the year to mid-December, the exchange rate has been consolidating within the 7.04 to 7.3 range, appreciating about 3% over the year. The offshore market experienced slightly larger fluctuations, oscillating between 7.02 and 7.4.

The latest breakthrough occurred on December 15. Driven by the Federal Reserve’s rate cut decision and easing expectations, the renminbi against the US dollar surged past the 7.05 mark, with the rally continuing and reaching a 14-month high of 7.0404. This turning point is significant — the market generally believes that the long-term depreciation cycle that began in 2022 has come to an end, and the renminbi is now brewing a new phase of medium- to long-term appreciation.

Four Major Factors Determining the Exchange Rate Direction

The shift in the US dollar index is key

In the first half of 2025, the US dollar index fell from a high of 109 to 98, marking the weakest first half since the 1970s. In the second half, although market expectations for Fed rate cuts cooled temporarily, the dollar rebounded and repeatedly hit the 100 level, but after the Fed’s rate cut in December, the dollar index retreated again to a low of 97.87, entering the 97.8-98.5 range.

A weakening dollar usually means more room for the renminbi to rise. The past five years’ trend confirms this logic — during the dollar’s softness in 2020-2021, the renminbi appreciated to around 6.3; in 2022, when the dollar surged to 109, the renminbi depreciated to 7.25. Now, with the dollar weakening again, the upward momentum for the renminbi is gradually building.

Changing Atmosphere in US-China Negotiations

Although the latest round of talks in Kuala Lumpur reached a trade truce — with fentanyl-related tariffs reduced from 20% to 10%, and the suspension of the 24% reciprocal tariff increase until November 2026 — the durability of this agreement remains to be seen. A similar agreement reached in Geneva in May this year quickly fell apart, serving as a lesson.

However, the current easing of negotiation tensions at least alleviates market pessimism. As long as friction does not escalate, the renminbi is likely to remain relatively stable; if relations worsen, the exchange rate will face renewed pressure.

Subtle Balance of Central Bank Policies

The People’s Bank of China tends toward easing policies to support economic recovery, especially amid a sluggish real estate sector. Rate cuts or reserve requirement ratio reductions will release liquidity, exerting short-term downward pressure on the renminbi. However, if these measures are combined with fiscal stimulus and ultimately stabilize and improve the economy, they can, in the long run, boost the renminbi.

Conversely, if the Federal Reserve maintains high interest rates or slows the pace of rate cuts (e.g., with inflation persisting at high levels), the dollar will be supported, putting pressure on the renminbi; faster rate cuts will weaken the dollar.

Long-term Support for Renminbi Internationalization

The use of the renminbi in global trade settlement is increasing year by year, with expanding swap agreements with other countries, providing structural support for the long-term stability of the renminbi. While the US dollar’s reserve currency status remains difficult to challenge in the short term, the international standing of the renminbi is quietly rising.

Consensus Forecasts from International Investment Banks

Several top institutions are optimistic about the future trend of the renminbi:

Deutsche Bank believes that recent appreciation signals the start of a long-term appreciation cycle. The bank forecasts the renminbi will reach 7.0 by the end of 2025 and further appreciate to 6.7 by the end of 2026.

Goldman Sachs, whose global FX strategy chief issued a report mid-year, caused a market stir. They significantly raised their 12-month exchange rate forecast from 7.35 to 7.0, suggesting that the “breaking 7” point for the renminbi could occur much earlier than expected. Their logic is based on: the current real effective exchange rate of the renminbi is undervalued by 12% relative to the ten-year average, with an even larger undervaluation of 15% against the dollar. Considering progress in US-China negotiations, the renminbi’s appreciation potential is evident. Additionally, strong Chinese exports and the government’s preference for policy tools rather than currency depreciation to stimulate the economy are supporting factors.

How Should Investors Respond?

Short-term outlook: The renminbi will remain relatively strong, moving inversely to the dollar, but with limited amplitude, mainly consolidating within 7.0-7.3. The probability of quickly breaking below 7.0 before the end of 2025 is low.

Key variables to monitor: US dollar index trends, signals from the renminbi midpoint rate adjustments, and China’s policy efforts to stabilize growth.

Horizontal reference: Comparing the renminbi with the Hong Kong dollar also offers insights. As an Asian currency pegged to the renminbi, the Hong Kong dollar’s exchange rate often reflects regional capital flows. When the HKD strengthens, it usually indicates rising market expectations for renminbi appreciation, and vice versa.

Core Framework for Judging Exchange Rate Trends

1. The Tightness of Money Supply

The People’s Bank of China’s rate cuts or reserve requirement ratio reductions increase the money supply, which theoretically exerts downward pressure on the renminbi; conversely, rate hikes or reserve ratio increases tighten liquidity and support the renminbi. Between 2014-2016, six consecutive rate cuts and significant reserve requirement reductions led to the USD/RMB rising from 6 to nearly 7.4, validating this logic.

2. Are Economic Data Healthy?

When China’s economy grows steadily and outperforms other emerging markets, foreign capital continues to flow in, increasing demand for the renminbi, which appreciates. Conversely, economic slowdown, reduced foreign investment, or shifting to other countries weaken the renminbi.

Key indicators include:

• Quarterly GDP data: reflect macroeconomic outlook
• Manufacturing PMI: official version covers large and medium-sized enterprises; Caixin focuses on small and medium-sized firms
• Services PMI: important for economic structural upgrading
• Consumer Price Index (CPI): measures inflation; high inflation may trigger policy adjustments
• Fixed Asset Investment: reflects domestic demand momentum

3. The US Dollar Trend and Federal Reserve Policies

The dollar’s movement directly determines USD/RMB fluctuations. For example, in 2017, the Eurozone’s stronger-than-US recovery and ECB’s tightening signals caused the euro to rise, and the dollar index to fall 15% for the year. During the same period, USD/RMB also declined significantly, showing high correlation.

The Fed’s rate decisions, inflation expectations, and employment data are core variables influencing the dollar.

4. The Intent of Official Exchange Rate Guidance

Unlike freely floating currencies, the RMB midpoint rate includes official guidance components. The 2017 reform adjusted the model to “closing price + a basket of currencies exchange rate change + counter-cyclical factor,” enhancing official influence. In the short term, this factor has a noticeable impact, but the medium- to long-term trend still mainly depends on the market’s overall direction.

Five-Year Review: From Appreciation to Depreciation and a New Cycle

2020: Started the year in the 6.9-7.0 range, but due to trade tensions and the pandemic, depreciated to 7.18 in May. As China led pandemic control, the Fed cut rates to near zero, and US-China interest rate spreads widened, the renminbi rebounded strongly to 6.50 by year-end, appreciating about 6%.

2021: Strong exports, economic recovery, stable monetary policy, and a low dollar index kept the renminbi in a narrow 6.35-6.58 range, reaching its strongest level for the year.

2022: The Fed aggressively raised interest rates, the dollar surged, and China’s pandemic restrictions hampered growth. USD/RMB rose from 6.35 to over 7.25, depreciating about 8%, the largest decline in recent years.

2023: Post-pandemic recovery fell short of expectations, and the real estate crisis persisted, pressuring the renminbi. USD/RMB fluctuated between 6.83 and 7.35, ending the year at 7.1.

2024: The weakening dollar eased pressure on the renminbi, and China’s fiscal stimulus boosted confidence. The exchange rate rose to 7.3 in the first half, offshore RMB broke 7.10 in August, with increased volatility but an overall upward trend.

Conclusion

As China enters a loose monetary policy cycle, the USD/RMB trend has experienced a clear turnaround. Similar policy-driven cycles in the past can last up to ten years, during which short- to medium-term fluctuations caused by dollar volatility and unexpected events are common, but the overall direction is gradually established. Investors can significantly improve decision success rates by focusing on the four key influencing factors above. The forex market is driven by macro factors, with transparent economic data, large trading volumes supporting two-way trading, making it relatively fair for retail investors.

It is worth noting that offshore RMB (CNH), traded in Hong Kong, Singapore, and other international markets, is less restricted by capital controls, often exhibiting larger fluctuations than onshore RMB (CNY). Although CNH/USD experienced multiple shocks in 2025, the overall trend remains upward. After falling below 7.36 at the start of the year, it recently rebounded above 7.05, gaining over 4%. The synchronized strengthening of the HKD against the RMB further confirms the establishment of the renminbi appreciation cycle.