Driving Factors for the Appreciation of RMB Spot Exchange Rate: Sustained

Appreciation Guided by a Strong Central Parity

In our special report "Exchange Rate: Central Parity Signals Appreciation, Capital Bets on Catch-Up" at the end of July, we argued that since July, the central parity had maintained a gradual appreciation, and the strong guiding signals it released had been absorbed by the spot exchange rate market. The trend of gradual RMB appreciation showed signs of accelerating in the short term, and it was expected that the USD/CNY spot quotation would decline to the range of 7.10-7.15 in August. The sharp breakout of onshore and offshore RMB spot exchange rates on the evening of August 28 indicated that the signaling guidance of the central parity since July had gradually been absorbed by the market. Supported by heightened expectations in the foreign exchange market for a Fed rate cut in September and the continued structural weakness of the US dollar index in August, the spot exchange rate appreciated at a relatively rapid pace.

On August 29, the USD/CNY central parity was set at 7.1030, up 33 basis points from the previous trading day and still 251 basis points lower than the Bloomberg-predicted central parity, continuing to signal guidance for appreciation. It is expected that after USD/CNY and USD/CNH break below the 7.15 level, the spot exchange rate may accelerate its convergence toward the central parity, and cross-border capital flowing back into RMB could promote domestic liquidity easing.

Potential Reversal of RMB "Carry Trade": Rising Volatility

Since May 2025, the RMB exchange rate has remained in a "low-volatility" state, and the approximately 260 bps interest rate inversion between China and the US has once again attracted RMB-based "carry trades." However, the carry trade relying on "tranquility" may be disrupted by the rising volatility. Taking the evening of August 28 as a turning point, the RMB exchange rate may enter a phase of rising volatility, and the unwinding of carry trades since May could further drive the appreciation of the spot exchange rate.