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

Summary

Since late January 2026, the RMB has experienced a significant acceleration in appreciation; to curb the rapid rise, the PBOC announced on February 27th a reduction in the foreign exchange risk reserve ratio. How does this round of appreciation compare to previous cycles, and can central bank tools reverse the trend? This article provides an analysis for reference.

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

(1) Why has the RMB accelerated recently? Under sustained appreciation, a “herd effect” in settlement may be emerging

Since the beginning of 2026, the RMB 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/RMB increase of about 2.7%. However, since December, the appreciation rate has sharply increased: from December to January, the annualized USD/RMB appreciation rose to 11.5%; since February, the pace further accelerated to 24.6%, which is quite rare historically.

The early phase of this appreciation was driven by seasonal 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 RMB against USD has still strengthened by 1.5%. High-frequency data indicate: 1) RMB inquiry and transaction volumes remain high, suggesting the “settlement wave” persists even after seasonal decline; 2) Swap points in the “settlement wave” have fallen rather than risen, possibly due to higher forward settlement rates, reflecting a strengthening consensus among enterprises on RMB appreciation.

(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 PBOC announced a reduction of the foreign exchange risk reserve ratio from 20% to 0%, aiming to boost enterprises’ forward FX purchase demand 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 scale. If RMB continues to appreciate, other macroprudential tools like FX deposit reserve ratios and cross-border financing parameters may also be employed.

Historically, such tools tend to regulate the pace rather than alter the trend. For example, after the September 2017 reduction, the RMB briefly adjusted, then appreciated again from 6.67 to 6.29, but the appreciation rate slowed from an annualized 11.2% to 4.3%. Similarly, in October 2020, RMB rebounded from 6.74 to 6.47 within three trading days. Other FX regulation tools have shown similar effects.

(3) Possible future exchange rate developments? Short-term adjustments or phase corrections, with a long-term trend of steady appreciation

In the short term, the PBOC’s “smoothing” operations may lead to temporary adjustments, and markets are already showing some “divergence.” After the September 2017 and October 2020 reserve ratio cuts, RMB appreciated by 3.2% and 0.4% respectively over 15 and 3 trading days. The options market also shows signs of loosening: since January, the 25-delta risk reversal has risen and turned positive again, indicating some funds are using options to hedge against RMB depreciation risks.

In the medium term, the exchange rate will still 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 that period, this round involves a larger “pending settlement” scale and healthier fundamentals, suggesting potential for continued appreciation. Factors like a rebound in the USD 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
• Fed’s hawkish shift beyond forecasts

Main Report

Since late January 2026, the RMB has appreciated notably faster; on February 27, the PBOC announced a reduction in the foreign exchange risk reserve ratio to curb the rapid appreciation. How does this cycle compare to previous ones, and can central bank tools reverse the trend?

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

(1) Why has the RMB accelerated recently? Under sustained appreciation, a “herd effect” in settlement may be emerging

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: from April 2025, the appreciation cycle can be divided into six phases. The first phase, during trade war easing, saw rapid correction; from May to November 2025, appreciation was relatively stable, with an annualized USD/RMB increase of about 2.7%. Since December, the appreciation rate surged: from December to January, annualized appreciation reached 11.5%; since February, it accelerated further to 24.6%.

The phases are as follows:

1. April to Geneva Agreement period: RMB recovery amid trade war easing expectations;
2. Mid-May to late August: USD/RMB fluctuated with dollar movements;
3. September: appreciation driven by accelerated settlement and dollar weakening;
4. October to November: in the context of the “three prices” convergence, the PBOC possibly reactivated countercyclical factors and guided the central parity;
5. December to late January: USD weakness and settlement wave resonance;
6. Since February: USD rebound with further RMB appreciation.

(2) The RMB appreciation in January was mainly due to “year-end settlement wave” and dollar weakness. The delayed Chinese New Year in January extended the settlement effect, with December and January settlement rates reaching their highest since 2017. Bank FX surplus also hit new highs. The dollar’s weakness was supported by concerns over Japanese intervention amid yen weakness and geopolitical issues like Greenland tensions. Both onshore and offshore trading benefited from dollar weakness.

(3) The acceleration since late January shows signs of herd behavior and panic defense. Besides tariff reductions, the further appreciation occurred against a backdrop of dollar rebound: since January 27, the dollar appreciated by 1.9%, while RMB against USD still strengthened by 1.5%. High-frequency data show: 1) RMB inquiry and transaction volumes remain high, indicating the settlement wave persists; 2) swap points in the settlement wave have fallen, possibly due to higher forward rates, reflecting a strengthening consensus among enterprises.

Theoretically, accelerated settlement by exporters should raise actual swap points and the swap spread, as large FX sales increase bank dollar positions. To hedge risks, banks sell spot USD and buy forward USD, which tends to push swap points higher. However, recent data show swap points have fallen, possibly because of increased forward settlement contracts, indicating enterprises’ expectations of RMB appreciation are forming and they are using forward contracts defensively.

(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 PBOC reduced the FX risk reserve ratio for forward sales from 20% to 0%, aiming to boost forward FX demand and slow the appreciation. Mechanically, lowering the reserve ratio signals policy intent and can influence supply and demand: it reduces banks’ capital costs, encouraging them to offer more forward FX to clients, thus easing appreciation pressure. Past reductions in September 2017 and October 2020 had limited impact on actual FX purchase volumes. If appreciation continues, other macroprudential tools like cross-border financing parameters and FX deposit reserve ratios may also be employed.

Adjusting the forward FX risk reserve ratio affects bank costs, aiming to stimulate forward FX demand and slow appreciation. When the reserve ratio drops to zero, it effectively removes implicit interest costs for banks, reducing the overall cost for enterprises to hedge FX risk. For example, at a 4% USD loan rate, a full pass-through could lower enterprise hedging costs by about 0.8%. But actual effectiveness depends on banks’ willingness to pass on costs and enterprises’ expectations, so immediate effects may be limited.

This operation is a continuation of countercyclical regulation amid rapid RMB appreciation. Future tools like macroprudential parameters for cross-border financing and FX deposit reserve ratios may also be used. Since November 27, 2025, the PBOC’s countercyclical factor has been positive, signaling efforts to restrain RMB’s rapid appreciation; as of February 27, the cumulative effect reached a record high of 793 pips. The FX risk reserve ratio cut is part of this policy stance. Historically, if RMB continues to appreciate, other tools like adjusting cross-border financing parameters and FX reserve ratios could be employed, with past adjustments in early 2021 serving as references.

Overall, the PBOC’s tools tend to regulate the pace rather than the long-term trend. For example, after the September 2017 reserve ratio cut, RMB appreciated by 3.2% over 15 days, then resumed appreciation from 6.67 to 6.29, but the appreciation rate slowed from 11.2% to 4.3%. Similarly, in October 2020, RMB appreciated by 0.4% over three days, then again from 6.74 to 6.47, with the tools mainly slowing the pace.

(3) Future exchange rate developments? Short-term adjustments or phase corrections, with a long-term trend of steady appreciation

In the short term, the PBOC’s smoothing operations may lead to temporary corrections, and markets are showing some divergence. After the September 2017 and October 2020 reserve ratio cuts, RMB appreciated by 3.2% and 0.4% over 15 and 3 days respectively. Future tools like FX reserve ratio adjustments and macroprudential parameters may be introduced. The spot FX settlement boom persists, but options markets show some loosening: implied volatility of 3-month at-the-money options has slightly risen since January, indicating some market divergence; the 25-delta risk reversal has risen and turned positive again, showing some funds are hedging against RMB depreciation via options.

In the medium term, the exchange rate will still be driven by market forces, with appreciation phases similar to the second half of 2021. Since the 2015 “811” reform, there have been nine appreciation phases, six driven by USD depreciation and two during the easing of trade tensions in 2018-2019. The appreciation from July 2021 to February 2022 was driven by accumulated export settlement, endogenous market momentum, and central bank countercyclical interventions. Under the support of settlement waves and foreign capital inflows, RMB appreciated until the Fed’s rate hikes.

Compared to 2021, this round involves a larger pending settlement scale and healthier fundamentals, suggesting potential for continued appreciation. Factors like a USD rebound or rising trade tensions could influence the pace but are unlikely to reverse the long-term appreciation trend.

Risk Warnings

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

(Article source: Shenwan Hongyuan)