Rising US Treasury Yields Fail to Shake RMB Stability as Current Account Takes Over Exchange-Rate Pricing

Since 2026, pricing power over the exchange rate has shifted to the current account, which has become the underlying logic of the RMB's basic stability in this cycle.

By Liao Zongkui

The Federal Reserve has resumed rate hikes after a three-year pause and US Treasury yields keep climbing, yet the RMB exchange rate has essentially stayed on its stable course. As of September 18, USD/CNH had broken through 6.7, and the yuan has held a steady-to-appreciating trajectory for two consecutive years.

In its China Monetary Policy Report for the second quarter of 2026, the People's Bank of China stated that it adheres to letting market supply and demand play the decisive role in exchange rate formation, gives full play to the exchange rate's function in adjusting the macroeconomy and the balance of payments, applies policies in a comprehensive manner, and keeps the RMB exchange rate basically stable at a reasonable and balanced level.

Under the market's traditional framework, the China-US interest rate spread is the core pricing anchor for the RMB. Interest rate parity theory holds that when US Treasury yields rise and the China-US spread widens, cross-border capital tends to sell renminbi assets in favor of dollar assets, putting the RMB under pressure. That was indeed how the yuan traded in 2022: with the 10-year China-US spread inverted, USD/CNH surged from around 6.3 to above 7.3 within months, as spread-driven capital outflows dominated exchange-rate pricing.

But the RMB's steady-to-firmer run in 2025-2026 has broken that conventional wisdom, leaving many investors puzzled: has interest rate parity stopped working? What fundamental change has occurred in the RMB's pricing logic? Is this divergence a short-term impulse or a medium-to-long-term reshaping?

The nature of rising US Treasury yields

Whether the interest rate parity model can dominate RMB pricing depends first on what is driving the move in US yields. Many investors hold an entrenched misconception that rising Treasury yields equate to a stronger dollar. But the current surge in long-end US yields differs fundamentally from 2022 — and that is the key to understanding the RMB's stability with an upward bias.

According to the New York Fed's model, the 10-year nominal Treasury yield can be decomposed into expectations of future short-term policy rates (the risk-neutral rate) and the term premium. In 2022, yields rose mainly because the risk-neutral rate climbed — markets were pricing sustained aggressive Fed hikes, an overheating US economy and runaway inflation, which lifted the risk-free return on dollar assets and drew global capital into dollars, pushing the dollar index above 114 at one point. Back then, rising Treasury yields translated directly into a stronger dollar, and the China-US spread was the core of exchange-rate pricing.

In 2026, the core driver of higher Treasury yields is term-premium expansion rather than an unexpectedly strong US economy. The US federal debt has surpassed 40 trillion dollars, with annual fiscal deficits close to 2 trillion dollars; massive Treasury issuance, compounded by continued net selling by foreign central banks, has led markets to demand higher long-term risk compensation, pushing up the long-end term premium. When long yields rise on fiscal debt-supply shocks rather than an overheating economy, the boost to the dollar from higher yields fades sharply, producing a pattern of 'rising rates without a strong dollar.'

The data clearly bear this out. In 2026, the 10-year Treasury yield has risen more than 80 basis points, yet the dollar index has mostly oscillated around 100 and has not strengthened in tandem — the once-strong correlation between Treasuries and the dollar has weakened markedly. In other words, the carry appeal of higher Treasury yields is being offset by the long-term credit risk premium on the dollar. Capital does not flood into dollar assets indefinitely just because yields are higher. The interest-rate-parity carry logic itself rests on economically driven rate increases; once the source of rising yields shifts, that logic naturally fails.

Changjiang Securities notes that the combination of elevated US yields and a weaker dollar is historically rare, and that it coincides with foreign investors reducing Treasury holdings after Trump took office in 2025. The deeper logic appears to lie not in traditional cyclical fluctuations but in concerns over US fiscal sustainability, Fed independence and even a reordering of the global order.

The current account takes over pricing power

The exchange rate is, in essence, the outcome of supply and demand in the FX market, which is jointly determined by the current account and the capital and financial account. Whichever force is stronger dominates pricing. In 2022 the financial account dominated; in 2026 pricing power has switched to the current account — the underlying logic of the RMB's steady-to-firmer performance this cycle.

Balance-of-payments data from SAFE show that in the first half of 2026, China's current account surplus reached 379.4 billion dollars, including a goods trade surplus of 526.3 billion dollars, with the huge goods surplus continuously supplying dollars to the market. But a trade surplus alone does not automatically translate into a stronger yuan — the key variable is the settlement behavior of foreign trade companies.

From 2022 to 2024, after receiving dollar payments, exporters largely kept offshore dollar deposits to enjoy high Treasury yields; their willingness to convert was low and large sums of dollars sat idle in overseas accounts.

From late 2025, expectations reversed. With the RMB steady to firmer, the opportunity cost of holding dollars rose, and companies shifted from 'holding dollars and waiting' to 'selling dollars on strength.' The concentrated release of the dollar overhang produced a non-linear settlement surplus. SAFE data show that in the first half of 2026, banks' FX settlements on behalf of clients exceeded purchases by 271.2 billion dollars, far above the same period of 2025. A persistently high settlement surplus means dollar supply in the interbank FX market has continuously exceeded demand.

Although the financial account keeps registering outflows due to the inverted spread, the dollar supply released by current-account settlement is far larger and fully covers the dollar demand from capital-account outflows. With FX supply and demand dominated by settlement flows, the divergence emerges: a deepening China-US spread inversion alongside a steady-to-firmer yuan.

The outflow pressure from the capital account has not disappeared; it is being offset by current-account settlement flows. The capital-account deficit acts as a ceiling on RMB appreciation, capping the slope of gains but not reversing the direction. In addition, the global push for reserve diversification is intensifying: central banks keep reducing dollar asset allocations and increasing renminbi holdings, which likewise offsets short-term capital outflow pressure under portfolio investment.

Implications for major asset classes

Of course, the logic of a steady-to-firmer yuan is not set in stone. Once the underlying variables change, the main pricing driver of the exchange rate will switch too.

The 500-billion-to-800-billion-dollar stock of offshore dollars is the source of this round of settlement-driven gains. As that stock is progressively converted, the settlement surplus will revert to a normal level matching the monthly goods surplus, with no extra incremental supply, and the momentum it provides for RMB appreciation will fade.

The driver behind rising US yields is the key watershed. If the driver switches to an unexpectedly strong US recovery or a rebound in inflation, the dollar index will strengthen in tandem, and spread pressure would once again become the dominant factor for the RMB.

Then there is the resilience of the current account surplus. If external demand weakens and export growth slows, the goods surplus will shrink and the underlying dollar supply will erode. In 2026, the structural bright spots in exports come from machinery and electronics and AI-related smart equipment, but global external demand remains soft and uncertain. Meanwhile, the deeply inverted China-US spread will continue to constrain: it suppresses foreign appetite for renminbi bonds, and a persistent capital-account deficit limits the ceiling on RMB appreciation.

The most important lesson from this steady-to-firmer RMB cycle is to abandon the habit of pricing the currency off a single indicator. The RMB needs a multi-layered framework: first, FX market supply and demand — the current account surplus, banks' client settlement flows and corporate dollar conversions; second, the drivers behind the dollar index — distinguishing economically driven rate increases from term-premium-driven ones; third, cross-border capital flows and policy expectations — daily fixing signals, macroprudential measures and so on.

For major asset classes, a steady-to-firmer RMB helps stabilize domestic asset pricing and eases external constraints at the margin, allowing monetary policy to stay more firmly 'oriented toward domestic conditions.' But investors should not underestimate the tail risks from Treasury market turbulence: if US fiscal or inflation variables shift more than expected and the dollar strengthens again, the exchange-rate pricing regime could switch once more, and investors need to prepare in advance.

This article was published in the September 26, 2026 issue of Securities Market Weekly.