Shenwan Hongyuan: RMB Accelerates Appreciation, Will Central Bank Tools Reverse the Trend?

Summary

Since late January 2026, the renminbi has appreciated significantly faster; to curb the rapid appreciation, the People’s Bank of China announced on February 27th a reduction in the foreign exchange risk reserve requirement. How does this round of appreciation compare to previous cycles, and can central bank tools reverse the trend? This article provides analysis for reference.

1. Hot Topic: RMB Appreciation—Pause or Variation?

(1) Why has the renminbi accelerated in recent times? Under sustained appreciation, a “herd effect” in foreign exchange settlement may be emerging.

Since the beginning of 2026, the renminbi has continued to strengthen, with signs of acceleration since late January. As of February 27, 2026, offshore RMB briefly broke through 6.83 and approached 6.80. Looking at the entire appreciation cycle, the appreciation from May to November 2025 was relatively stable, with an annualized USD exchange rate increase of about 2.7%. However, since December, the appreciation rate has clearly accelerated, with annualized gains reaching 11.5% in December-January and further accelerating to 24.6% since February, which is quite rare historically.

The early phase of this appreciation was due to seasonal foreign exchange settlement and a weakening dollar, but the further acceleration since late January shows signs of “panic-driven settlement.” Since January 27, the dollar has appreciated by 1.9%, while the RMB against the dollar has still strengthened by 1.5%. High-frequency data show: 1) RMB inquiry and transaction volumes remain high, indicating the “settlement wave” may still persist after seasonal decline; 2) Swap points in the “settlement wave” have fallen rather than risen, possibly due to higher forward exchange rates, reflecting a strengthening consensus among enterprises that the currency will continue to appreciate.

(2) Will the central bank’s intervention reverse the trend? Historical review suggests it can smooth the rhythm but is unlikely to change the overall trend.

On February 27, the People’s Bank of China announced a reduction of the foreign exchange risk reserve requirement ratio from 20% to 0%, aiming to boost enterprises’ forward foreign exchange purchases and ease the rapid unilateral appreciation of the RMB. This tool signals policy intent and may stimulate enterprises to increase forward FX purchases, alleviating the appreciation trend. However, past uses in September 2017 and October 2020 had limited impact on actual FX purchase volumes. If appreciation continues, other macroprudential tools like FX deposit reserve ratios and cross-border financing parameters may also be employed.

However, historically, such tools mainly regulate the pace rather than the trend. For example, after the September 2017 reduction, the RMB appreciated from 6.67 to 6.29, but the appreciation rate slowed from an annualized 11.2% to 4.3%. Similarly, after the October 2020 cut, the RMB rebounded from 6.74 to 6.47 within three days. Other FX regulation tools have shown similar effects.

(3) What are the possible future developments of the exchange rate? Short-term adjustments or phase corrections, with a long-term trend of steady appreciation.

In the short term, the PBOC’s “smoothing” operations may ease “panic-driven settlement,” and markets are already showing some “dissent.” Historically, after similar interventions in September 2017 and October 2020, the RMB adjusted by 3.2% and 0.4% over 15 and 3 trading days, respectively. The options market also shows signs of loosening: the 25 delta risk reversal has been rising since January and turned positive again, indicating some funds are using options to hedge against RMB depreciation risks.

In the medium term, the exchange rate will likely be driven by market forces, with some continuation of appreciation. The nine appreciation phases since the 2015 “811” reform are similar to the second half of 2021; compared to then, the current “pending settlement” scale is larger, and fundamentals are healthier, suggesting appreciation may persist. Factors like a rebound in the dollar or rising trade tensions could influence the pace but are unlikely to reverse the long-term steady appreciation trend.

Risk Warnings

• Escalation of geopolitical conflicts
• US economic slowdown exceeding expectations
• Federal Reserve’s hawkish shift beyond forecasts

Main Report

Since late January 2026, the renminbi has appreciated markedly faster; on February 27, the People’s Bank of China announced a reduction in the foreign exchange risk reserve requirement ratio. How does this cycle compare to past ones, and can central bank tools reverse the trend?

1. Hot Topic: RMB Appreciation—Pause or Variation?

(1) Why has the RMB accelerated recently? The herd effect in settlement may be emerging amid sustained appreciation.

Since the start of 2026, the RMB has continued to strengthen, with acceleration signs since late January. As of February 27, offshore RMB briefly broke 6.83 and approached 6.80. The recent acceleration is notable: the appreciation cycle since April 2025 can be divided into six phases. Initially, from late April to the Geneva Agreement period, RMB appreciation was a correction amid easing trade war expectations. From May to August, the RMB fluctuated with the dollar. In September, appreciation was driven by accelerated settlement and dollar weakening. October to November saw the central bank possibly reactivating countercyclical factors amid a “three-price convergence” scenario. December to January, the dollar weakened alongside a settlement wave. Since February, despite dollar rebounds, RMB appreciation has further accelerated.

The January appreciation was mainly due to a “year-end settlement wave” coinciding with dollar weakness. The delayed Chinese New Year in February also contributed, with settlement rates reaching their highest since 2017. The dollar’s decline was driven by concerns over yen interventions and geopolitical issues like Greenland. High-frequency data show that both onshore and offshore markets benefited from the exchange rate trend.

(2) Theoretically, accelerated settlement by exporters should raise actual swap points and the swap spread, as large FX sales increase dollar positions for banks. To hedge risks, banks sell spot dollars and buy forward dollars, pushing swap points higher.

Recently, however, the swap spread has fallen despite a settlement wave, possibly because of increased forward settlement activity. When enterprises sign many forward contracts, banks buy forward dollars, and to hedge FX risk, they perform buy/sell swaps, which can influence swap points.

If only spot settlement occurs, it reflects existing “pending settlement” funds. Rising forward rates suggest a market expectation of continued RMB appreciation, prompting enterprises to hedge with forward contracts.

(3) Will the central bank’s intervention reverse the trend?

On February 27, the PBOC lowered the forward FX risk reserve requirement from 20% to 0%, aiming to boost forward FX purchases and slow appreciation. This signals policy intent and affects supply-demand: lowering the reserve ratio reduces banks’ costs, encouraging more forward FX purchases, which can slow appreciation. Past interventions in September 2017 and October 2020 had limited impact on actual FX volumes but did slow appreciation rates.

The mechanism involves reducing banks’ costs to encourage forward FX buying, but effectiveness depends on banks’ willingness and enterprises’ expectations. The operation is more about smoothing the rhythm than reversing the trend.

(2) Will the trend change?

Historical data show that such tools mainly regulate pace. For example, after the September 2017 cut, the RMB appreciated from 6.67 to 6.29 over 15 days, but the appreciation rate slowed from 11.2% to 4.3%. Similarly, after the October 2020 cut, the RMB rebounded quickly. These tools tend to slow appreciation rather than reverse it.

(3) Future outlook: Short-term adjustments or phase corrections, with a long-term trend of steady appreciation.

In the short term, the PBOC’s smoothing may cause temporary corrections, and markets are showing some divergence. Historically, after similar interventions, the RMB adjusted by a few percent over days. The options market also shows increased implied volatility and risk reversals, indicating some hedging activity.

Medium-term, the RMB’s trend will likely be driven by market forces, with appreciation possibly continuing. The 2021 appreciation cycle, supported by export surges and capital inflows, is similar to current conditions, but the larger pending settlement scale and healthier fundamentals suggest a continued upward trend. External shocks like dollar rebounds or trade tensions could influence the pace but are unlikely to reverse the overall appreciation trend.

Risk Warnings

• Escalation of geopolitical conflicts
• US economic slowdown beyond expectations
• Federal Reserve’s hawkish shift exceeding forecasts