New World Investment Research

CNY broke the 7.0 level per USD in the onshore market for the first time in about two years. It seems that Beijing is comfortable with further appreciation, but only if it comes gradually and under control.

Any sharp appreciation of the CNY will lead to an inflow of hot money driven primarily by expected currency gains, rather than fundamentals. This comes from speculative motives, and such inflows tend to behave like leveraged carry trades as investors position for FX appreciation and portfolio reallocation. In this case, PBOC will need to intervene by buying USD and selling CNY to keep the exchange rate under control. However, by pouring CNY into the market, PBOC effectively increases liquidity and brings short-term financing rates down, which would distort financial conditions and undermine policy control as well as potentially lead to unnecessary lending activity. Thus, the regulator will pursue sterilization by tightening lending conditions, but it will be counterproductive under current macro conditions.

This is especially concerning for China’s economy now given weak domestic consumption, extreme overcapacity, and a prolonged real estate crisis. We are likely to see continued CNY appreciation in 2026, but only incremental. This will align with the broad goal of China in boosting domestic demand and promoting imports as well as supporting renminbi credibility at the margin.