Trump was officially sworn in as President of the United States, and his statement on trade policy triggered market shocks. From January 20 to 21, the spot exchange rate of the yuan against the U.S. dollar appeared to rise significantly. late at night on January 20, the yuan staged a ‘big counterattack’, the offshore yuan against the U.S. dollar rose significantly, recovered 7.31, 7.30, 7.29, 7.28, 7.27 five marks, intraday gain of nearly 800 points, the highest touched near 7.26, hitting a new high for more than five weeks. As of 23:10 on 21 January, the offshore RMB exchange rate against the dollar rose to a maximum of 7.2524 near, rose above the 7.26 mark.
Insiders said that after the previous depreciation pressure on the yuan exchange rate has been released, the current positive factors to promote a new round of rebound in the yuan has been gathering. Into 2025, stable exchange rate clear signals released one after another, the People's Bank of China, the foreign exchange bureau announced the upward adjustment of cross-border financing macro-prudential adjustment parameters of enterprises and financial institutions, and repeatedly emphasised the ‘three resolute’, to the market a clear statement ‘the RMB exchange rate is fully conditional on maintaining basic stability ‘. In addition, the stability of China's import and export growth has been further enhanced, and a reasonable trade surplus will become a strong support for the RMB exchange rate. In addition, the eve of the Chinese New Year into the peak season, the market demand for foreign exchange settlement is expected to form a boost to the appreciation of the yuan.
At the same time, the U.S. dollar index 20 intraday straight down, once down to 108 below, down more than 1.3% during the day. Analysis pointed out that the dollar index weakened mainly because the market believes that Trump will introduce tariff hikes, which will bring more uncertainty to the U.S. financial markets, core inflation data and the Federal Reserve's interest rate reduction process.
According to the research team at CITIC Capital Securities, there are three main reasons for the recent sharp overnight rally in the RMB exchange rate. First, the recent Chinese central bank, the State Administration of Foreign Exchange continued to stabilise the exchange rate, the second is the U.S. inflation data and the new U.S. President Donald Trump came to power, the market on the Federal Reserve interest rate cuts are expected to change, thus inhibiting the dollar index, the third is the Trump assumed office ‘boots on the ground’, the market for the U.S.-China relations to slow down the worry.
Wang Qing, chief macro analyst at Oriental Jincheng, predicted that in the short term, the dollar will become the most important factor affecting the RMB exchange rate. Taking into account the new U.S. government came to power, the market will pay close attention to the rhythm of its policy, especially the implementation of its new tariff policy, therefore, the future period of time the dollar index will also be in a state of significant fluctuations. This means that the probability of sustained appreciation of non-US currencies such as the RMB against the US dollar is not high.
However, it is worth noting that, from the domestic fundamentals, regulatory stability exchange rate signals are frequently released, the RMB exchange rate stabilised with multiple support factors.
On 13 January, the People's Bank of China raised the macroprudential adjustment parameters for cross-border financing; on 14 January, at a press conference held by the State Council Information Office, PBOC Vice Governor Xuan Changneng mentioned ‘three resolute’ again, and made clear his stance that ‘the next stage is to keep the RMB exchange rate basically stable at a reasonable equilibrium level’. ‘.
In addition, the macro data released on 17 January showed that the domestic economic growth rate in the fourth quarter of 2024 rebounded significantly, GDP year-on-year growth rate reached 5.4%, a significant acceleration of 0.8 percentage points over the third quarter, exceeding the market's general expectations. This also brought stronger intrinsic support to the RMB exchange rate.
‘It should be pointed out that, at present, in the context of the general depreciation of non-U.S. currencies against the U.S. dollar, reflecting the overall real exchange rate level of the renminbi CFETS and other three major baskets of renminbi exchange rate index continued to operate in a strong state, the renminbi exchange rate risk is not large.’ Wang Qing said. Looking ahead to 2025, with an eye to effective changes in the external economic and trade environment, the RMB exchange rate flexibility tends to increase, and the tolerance of depreciation will also be improved. Maintaining the basic stability of the RMB exchange rate at a reasonable equilibrium level does not mean that the RMB exchange rate against the U.S. dollar should remain basically unchanged or fixate on a specific price level, but rather means that the three major baskets of RMB exchange rate indices, such as CFETS, should remain fundamentally stable and adapt to changes in economic fundamentals.
Ming Ming, chief economist of CITIC Securities, similarly pointed out that the recent disturbance by external factors, the RMB has fluctuated, and the exchange rate flexibility has increased. Looking ahead to 2025, considering the unsustainable contradiction between high inflation and high interest rates in the U.S. economy, the high level of the U.S. dollar is difficult to sustain, and the U.S. dollar index may fall back at the margin. Domestically, as more active macro policies continue to advance and take hold, the domestic economy continues to repair, while trade growth remains at a high level and export competitiveness remains strong.
Guan Tao, Global Chief Economist of BOC Securities, further pointed out that the recent fluctuations in the RMB exchange rate should be viewed objectively and rationally.2024 Since December, the deviation of the domestic RMB exchange rate trading price relative to the mid-price as well as that of the overseas RMB exchange rate trading price relative to the domestic RMB exchange rate trading price has gradually broadened, indicating that the depreciation pressures and expectations have been strengthened. Keeping the exchange rate flexible and reacting to shocks are normal exchange rate fluctuations, which help release market pressure and converge exchange rate expectations in a timely manner. At present, market participants for the exchange rate fluctuations in the adaptability and tolerance of the increase in foreign exchange market resilience, which is to increase the flexibility of the exchange rate of the underlying strength.