Offshore Renminbi Breaks Above 6.97 Against US Dollar, Reaching New High Since May 2023

The offshore renminbi rose above 6.97 per US dollar on December 30, marking a new high since May 2023. This surge follows the currency breaking past the psychological 7.0 threshold earlier in December, a level not seen in nearly two and a half years according to reports. The move reflects growing strength in the yuan amid improved economic expectations and capital inflows.

Chinese state media has raised concerns about the rapid appreciation, warning against one-sided bets on the currency's upward trajectory. Analysts cited in articles by Shanghai Securities News and China Securities Journal emphasized that the current trend may not be sustainable. Such warnings indicate the government's desire to manage expectations and avoid excessive swings in the currency.

The People's Bank of China has also signaled its focus on stabilizing the exchange rate. In a recent meeting, the Monetary Policy Committee stressed the importance of maintaining the yuan's stability at reasonable and balanced levels. This guidance underscores the central bank's role in preventing sharp movements that could disrupt economic activity.

Why Did This Happen?

The yuan's recent rise is supported by expectations of economic recovery and inflows of foreign capital. Market participants believe the currency remains undervalued and is likely to continue its upward trend in 2026 according to data. The onshore yuan's increase to 6.9960 on December 30 aligns with these expectations, showing a 0.1% gain and a high not seen since May 2023.

Chinese state media has highlighted the risks of rapid appreciation, cautioning that it could lead to volatility and overshooting risks. Analysts suggest that while the yuan is strengthening, a gradual and stable rise with two-way fluctuations is more likely under current conditions.

What Are Analysts Watching Next?

Market observers are focusing on the role of the People's Bank of China in guiding the yuan's movements. The central bank has been actively intervening, as seen in the deviation between the midpoint rate and market expectations in late December according to reports. This approach suggests a controlled and strategic effort to manage the currency's path.

Experts also note that external uncertainties, such as global economic conditions and interest rate differentials, will influence the yuan's behavior. Huatai Research has pointed out that a strong start to 2026 and easing Sino-US trade tensions could further support appreciation.

The central bank's emphasis on flexibility and stability reflects its broader goal of managing expectations and avoiding excessive swings. Carie Li, a global market strategist at DBS Bank, noted that two-way volatility is expected, indicating a balanced approach to the currency's future.

Analysts from BNY Markets and Huatai Research have expressed confidence in the yuan's continued strength. They point to inflows of foreign capital and economic recovery as key factors supporting a stronger renminbi. These trends are likely to encourage foreign investors to increase their exposure to renminbi assets.

The yuan's performance also has broader implications for China's trade and economic policies. With a fragile trade truce between the US and China, the currency's movement could reflect ongoing tensions and potential shifts in trade relations. Market participants will be watching for any changes in official stance or external developments that could impact the yuan's trajectory.

What Does This Mean for Investors?

Investors are advised to consider the yuan's potential for two-way fluctuations when making currency-related decisions. The central bank's guidance and the market's expectations suggest that while the yuan is likely to remain in a stronger range, significant swings should be anticipated.

The current environment also highlights the importance of risk management for businesses and financial institutions. Analysts have urged firms to adopt risk-neutral strategies to mitigate exposure to exchange rate volatility. This is particularly relevant for companies with significant international operations or those exposed to currency fluctuations.

Looking ahead, the yuan's movement is expected to be influenced by a range of factors, including global economic conditions, trade developments, and monetary policy in both China and the US. Analysts will be watching for signs of policy changes or shifts in trade relations that could impact the currency's trajectory.

For now, the yuan remains on an upward trend, supported by strong economic fundamentals and favorable market conditions. However, the path forward is likely to involve a mix of stability and volatility, with the central bank playing a key role in managing expectations according to market analysis.