Institutions: Drivers Of Sustained RMB Appreciation Are Increasing, Market Attention Is Heating Up

We advise investors to progressively adapt asset allocations to a regime in which the renminbi may continue to appreciate. Through the first eleven months of the year, China’s cumulative trade surplus reached USD 1.076 trillion, a year‑on‑year increase of 21.7% and a record high. Crucially, exporters’ willingness to convert foreign receipts into renminbi has risen markedly; in October the ratio of surplus converted into settlements exceeded 100%, a notable departure from recent years.

Since 2022, our estimates indicate exporters have accumulated roughly USD 1 trillion of unsettled foreign‑exchange receipts. Once expectations of RMB appreciation crystallize, repatriation of offshore funds can create reinforcing feedback that strengthens the currency’s momentum. Beyond long‑term strategic allocation, speculative capital globally has shown growing interest in physical assets this year. For example, sharp drops in the cryptocurrency fear‑and‑greed index have repeatedly coincided with rapid increases in holdings of the SPDR Gold ETF, a pattern that cannot be fully explained by central‑bank or retail gold purchases alone.

Assets that generate real cash flows, such as container ships, have also begun to attract capital migrating from crypto markets. The tokenization of physical assets has advanced more rapidly this year than tokenization of purely virtual assets. Given China’s position as the world’s largest manufacturing economy and the largest consumer of many commodities, the renminbi’s intrinsic value is likely to be reassessed over time.

In the near term, U.S. inflation data for November came in well below expectations, reinforcing market bets on Federal Reserve easing next year and increasing attention on RMB appreciation. The offshore USD/CNY spot rate is approaching the 7.0 threshold, while one‑, two‑ and five‑year forward rates have moved to 6.90, 6.79 and 6.44 respectively. The one‑year forward has appreciated by 313 basis points since December, and forward premia have widened.

Looking back over the past two decades, there have been seven distinct RMB appreciation cycles. The first, from July 2005 to July 2008, was driven by exports and urbanization and framed by a narrative of “RMB asset revaluation,” with strong performance in non‑bank financials, metals, coal, chemicals and new energy. The second cycle, from June 2010 to August 2015, coincided with China’s structural shift toward emerging industries and excess liquidity, benefiting sectors such as computers, media, communications and consumer services. The third cycle, January 2017 to February 2018, reflected a robust macro recovery and accelerated foreign inflows into A‑shares, favoring high‑ROE core assets and cyclical sectors. Of the subsequent cycles, only the May 2020–May 2021 episode showed sustained strength as China led the global recovery and supply‑chain advantages concentrated investor interest in new energy, food and beverage, and consumer services; other appreciation episodes were shorter and tied to temporary expectation improvements. Historical experience suggests that RMB appreciation is an outcome of specific phases rather than a sole determinant of sector allocation.

At the outset of an appreciation phase, certain industries often outperform as market participants act on intuitive transmission channels. Firms with high dependence on imported inputs can see procurement costs fall and margins expand when the currency strengthens; such narratives are easy to communicate and can produce short‑term consensus trades if sector fundamentals are intact. Typical examples include aviation, where fuel and parts costs and dollar‑denominated liabilities decline in local‑currency terms; paper manufacturing, which benefits from lower pulp import costs; and gas utilities that rely on imported feedstocks. Over longer horizons, however, profitability remains governed by supply‑and‑demand dynamics, and currency moves serve primarily as a supporting narrative.

Using 2023 input‑output data, we analyzed 211 subindustries to assess cost‑and‑revenue sensitivity under RMB appreciation and estimate that roughly 19% of industries could experience margin improvement. Beneficiaries tend to include upstream resource and raw‑material sectors such as steel, nonferrous metals, petrochemicals and basic chemicals; domestic consumer goods including agricultural products and light manufacturing; service‑related categories such as utilities, shipping and import‑oriented cross‑border e‑commerce; and manufacturing equipment producers.

Policy responses aimed at preventing an excessively rapid one‑way appreciation may ultimately exert greater influence on sector allocation than the appreciation itself. Rapid currency gains can invite speculative flows and erode manufacturing competitiveness. To manage appreciation pressures, policymakers have two broad levers. One is monetary accommodation to lower real interest rates, which could make the coming year more prone to unexpectedly easy policy and thereby support domestic demand. The other is measured liberalization of outbound financial investment by domestic institutions and households, which would diversify asset‑allocation channels, raise expected returns, and help domestic wealth‑management and financial firms expand internationally. Such moves could create new growth vectors for brokers and insurers and strengthen their global narratives.

If the renminbi embarks on a sustained appreciation path, investors may monitor three signals for allocation decisions: short‑term “muscle‑memory” trades that historically respond quickly to currency moves; sectors where margin improvement is a direct consequence of lower import costs; and assets that stand to gain from policy shifts such as monetary easing or capital‑account liberalization. Muscle‑memory trades typically include aviation, gas and paper; margin‑driven opportunities center on upstream materials, certain domestic consumer goods, shipping and machinery; and policy‑driven beneficiaries include duty‑free retail, property developers in an easing cycle, and financial firms with global ambitions.

Key risks to this outlook include an escalation of U.S.–China tensions across technology, trade and finance; weaker‑than‑expected domestic policy support or an underwhelming economic recovery; an unexpected tightening of global liquidity; further escalation of conflicts in Ukraine or the Middle East; and slower‑than‑anticipated absorption of China’s real‑estate inventory.