All Three RMB Exchange Rate Indexes Rise as CFETS Index Hits Highest Since July 2022

Xinhua Finance, Shanghai, October 19 (Reporter Ge Jiaming) — Data released by the China Foreign Exchange Trade System show that in the week of October 16, all three RMB exchange rate indexes rose. The CFETS RMB Exchange Rate Index stood at 103.7, up 0.09 week on week and the highest since July 2022. The BIS currency basket RMB index came in at 111.18, up 0.22, while the SDR currency basket RMB index was 98.63, up 0.13.

Last week (October 12-16), the US dollar index fluctuated lower, ending a four-week rising streak and falling from 102.58 to 101.78, a decline of about 0.78% for the week. Most non-US currencies gained: supported by high oil prices, the Norwegian krone and the Canadian dollar rose 1.42% and 0.82% against the dollar respectively; sterling gained 0.7% for the week on Bank of England rate hike expectations; and the euro rose 0.35% against the dollar.

The RMB continued its mild strengthening trend last week, with the offshore rate gaining 0.10% against the dollar to 6.6863. The central parity rate closed at 6.7220, up 110 basis points for the week. Analysts said the RMB's strength this round mainly reflects changes in trade receipts and payments and in domestic companies' foreign exchange settlement and sales behavior, while cross-border portfolio investment remains mixed. The future path will still depend on the dollar cycle, onshore-offshore interest rate differentials and cross-border capital flows.

The dollar's pullback helps ease external pressure on the RMB, but the fact that the RMB strengthened against a basket of currencies at the same time shows that its performance is also supported by domestic supply and demand factors. Li Liuyang, head of FX research at CICC Research, said exports performed strongly in September: in dollar terms, exports rose 36.3% year on year and imports 31%, with a monthly trade surplus of about US$133.5 billion, above August's US$119.1 billion. High exports and surpluses have kept foreign exchange supply relatively ample, an important support for a firm but modestly stronger RMB.

It is important to distinguish that a trade surplus does not equal the volume of settlement in the same period. Whether export earnings translate into foreign exchange market supply also depends on companies' collection, retention and settlement arrangements, while how importing companies use their own foreign exchange and when they purchase foreign currency also affects market supply and demand. Observing the RMB therefore requires looking at both trade data and companies' actual foreign exchange receipts and payments.

Guan Tao, chief economist at Huafu Securities, noted that the RMB's shift from weakness to strength this round was mainly driven by domestic entities' foreign exchange receipts and payments, with the improvement in the domestic foreign exchange balance mainly coming from trade in goods.

By his estimates, from May 2025 to August 2026, portfolio investment under banks' foreign-related receipts and payments for clients saw average monthly net outflows of US$17.8 billion, with net outflows in 10 of the 16 months. Portfolio investment under banks' settlement and sales of foreign exchange for clients recorded an average monthly surplus of US$3 billion, an improvement from earlier levels.

The two datasets reflect different stages. Foreign-related receipts and payments record cross-border fund flows, while settlement and sales record exchanges between foreign currency and the RMB; the two cannot be directly substituted, nor can either alone be used to judge whether foreign investors are comprehensively increasing Chinese asset holdings. Cross-border receipts and payments under portfolio investment, in particular, involve both domestic investors' outbound investment and foreign investors' inbound investment.

From a balance of payments perspective, foreign allocation of Chinese equities and bonds also differs. Guan noted that during this round of RMB appreciation, foreign equity investment remained in net inflow while foreign bond investment saw net outflows. Factors such as the negative China-US interest rate spread continue to affect foreign investors' willingness to hold RMB bonds.

From this perspective, the foreign exchange supply generated by the trade surplus and foreign allocation of RMB assets are different channels affecting the exchange rate. The RMB can strengthen on the back of trade receipts and payments, while foreign investment decisions must also consider asset returns, financing and hedging costs; appreciation expectations are not the only basis.

Looking ahead, CSC Financial expects the RMB to remain on a path of mild appreciation within the year. The trade surplus provides fundamental support, while the dollar cycle and cross-border capital flows will continue to affect short-term performance.

Wen Bin, chief economist at China Minsheng Bank, said China's economic fundamentals are solid, the balance of payments is expected to remain autonomously balanced, and the cross-border use of the RMB continues to increase, providing strong support for medium- and long-term exchange rate stability. However, exchange rates are affected by multiple factors, with forces for both appreciation and depreciation persisting, so the future path remains uncertain.

The continued opening-up of financial markets is also improving conditions for global investors to use and allocate RMB assets. On October 15, Pan Gongsheng, Governor of the People's Bank of China, said at an emerging markets seminar during the IMF and World Bank annual meetings that China will further support global investors and issuers in participating in Chinese financial markets, promote RMB bonds as widely recognized and used eligible collateral worldwide, enrich liquidity management and risk management tools, strengthen connectivity of onshore and offshore financial infrastructure, and support the development of the offshore RMB market.

These arrangements should improve the financing convenience, liquidity and risk management capacity of RMB assets, helping expand their international use and creating conditions for long-term allocation. However, the effects of institutional development will be released gradually and cannot be directly mapped to one-way short-term exchange rate moves.

At present, export resilience and relatively ample foreign exchange supply remain important supports for the RMB. Going forward, attention should focus on whether the trade surplus can be sustained, whether corporate settlement and sales behavior changes, and how US dollar interest rates and cross-border portfolio investment evolve. Under expectations of mild appreciation, the RMB may still see two-way volatility as internal and external factors change, and companies should manage exchange rate exposure based on actual receipts and payments rather than treating a short-term trend as the sole basis for business decisions.

(Source: Xinhua Finance)