Renminbi breaks through the 7 threshold: PBOC signals a gradual appreciation to stabilize the market

Recently, the global currency markets have been closely watching the strong performance of the renminbi. As the renminbi to US dollar exchange rate officially broke the 7.0 threshold, it reflected market expectations of China’s economic recovery and the dual impact of a weakening dollar. In the face of bullish pressure, the People’s Bank of China (PBOC) demonstrated flexibility in setting the midpoint rate but also signaled a reluctance for the exchange rate to appreciate too quickly, indicating an attempt by authorities to balance “market liberalization” and “exchange rate stability” to prevent a large influx of short-term speculative capital.

Renminbi Returns to the “6s”

The offshore exchange rate (CNH) briefly broke through the 7.0 mark (entering the 6.99 range) on December 25, reaching a new high since the end of 2024. Subsequently, due to profit-taking in the market and guidance from the official midpoint, it has slightly rebounded above 7.0.

The onshore market (CNY), limited by the daily trading band (a 2% fluctuation around the midpoint), responded more slowly than the offshore market but also remained near a 14-month high.

The breakthrough of the 7.0 level in the renminbi exchange rate signifies that both psychological and technical resistance levels since 2024 have been surpassed. This rally was mainly driven by expectations of Federal Reserve rate cuts, the return of foreign capital to Chinese stocks, and increased corporate foreign exchange demand.

PBOC Midpoint Signals a “Slow Bull” Trend

According to Bloomberg observations, the People’s Bank of China (PBOC) has recently shown greater flexibility in currency management. In the early stages of the renminbi’s appreciation, the central bank did not take drastic intervention measures, which the market interpreted as “conceding to the bulls.” This approach helps increase the two-way volatility of the exchange rate and reduces long-standing market stereotypes of either persistent depreciation or appreciation of the renminbi. However, this “concession” is not an unconditional laissez-faire but aims to allow market mechanisms to play a larger role in price discovery.

Although the renminbi broke through 7.0, the PBOC subsequently conveyed clear policy intentions through the daily fixing rate. Data shows that the official midpoint rate was often set significantly below market analyst expectations, a typical signal indicating that the authorities aim to guide the renminbi into a “gradual appreciation” path rather than a sharp surge, to avoid excessive impacts on export competitiveness.

Balancing Macroeconomics and Industry Competitiveness

While a rapid appreciation of the renminbi benefits lower import costs and attracts foreign investment into bond and equity markets, it also puts pressure on labor-intensive export industries. As China currently seeks to boost domestic demand, stable exports remain a key pillar supporting GDP growth. Therefore, the PBOC’s future focus will be on expectation management, fine-tuning liquidity and the midpoint rate to ensure the exchange rate fluctuates around a reasonable equilibrium level, avoiding volatility that could destabilize financial markets.

As China’s central bank adopts a cautious stance, Wall Street banks including Goldman Sachs and Bank of America forecast that the renminbi will appreciate by 2026, remaining below the 7.0 level. Even within China, an increasing number of domestic economists and former central bank officials are calling for a stronger renminbi to help the economy reduce over-reliance on exports and ease trade tensions.

This article “Renminbi Breaks 7 Threshold: PBOC Signals Slow Appreciation to Stabilize Market” was first published on Lian News ABMedia.