Asset Management Roundtable | CITIC Securities Guan Tao: Bidirectional Fluctuation of RMB is the Norm, Maintaining Exchange Rate Flexibility to Serve as a "Shock Absorber"

Reprinted from: Cailian Press

Cailian Press, March 13th — (Reporter Yang Yijun) At the recent Two Sessions, the government work report continued to set the tone of “keeping the exchange rate basically stable at a reasonable and balanced level.” By 2025, the RMB exchange rate will end its three-year period of pressure and begin to appreciate. By early 2026, the RMB has shown signs of accelerated appreciation. What are the reasons behind this round of appreciation? How should we currently view the “reasonable and balanced exchange rate level”? After multiple rounds of exchange rate reforms, what is the future direction of RMB market-oriented reform? Regarding these questions, Cailian Press recently interviewed Guo Tao, Chief Economist of Bank of China Securities.

Guo Tao believes that RMB appreciation is a market choice, supported by factors such as tariff reductions, a weakening US dollar, and solid domestic fundamentals. Going forward, bilateral exchange rate fluctuations will be normal, and exchange rate flexibility should be maintained to prevent the RMB from appreciating too rapidly in the short term. To promote market-oriented exchange rate reform, market participants need to further strengthen risk-neutral awareness.

(Picture: Guo Tao, Chief Economist of Bank of China Securities)

Weakening US dollar, stable economy, and both internal and external factors support the current RMB strength

Starting April 2025, the RMB exchange rate ended its three-year pressure period. Facing Trump’s maximum tariff pressure, the RMB appreciated against the trend. At the end of February this year, the RMB/USD exchange rate briefly hit 6.83.

Guo Tao reviewed the market situation, stating that in early April last year, the market was quite panicked, with the offshore RMB/USD exchange rate dropping below 7.42 at its lowest. However, after mid-May, China and the US established a trade consultation mechanism, began reducing tariffs, and the RMB rebounded and started to catch up. In 2025, after five rounds of negotiations and significant tariff reductions, China and the US reached a one-year trade truce agreement in October, greatly easing market sentiment.

On February 20th, the US Supreme Court ruled that the Trump administration’s large-scale tariffs were illegal. Guo Tao pointed out that if tariffs and fentanyl tariffs are canceled, China’s average tariffs will further decrease significantly compared to last year. “We saw China’s exports to the US turn positive again in February, and on the first trading day after the Spring Festival holiday, the domestic RMB trading price accelerated upward.”

Another external factor supporting RMB appreciation is the collapse of the US “exceptionalism” theory and the widening cracks in US dollar credit. The US dollar, as a traditional safe-haven currency, tends to appreciate when uncertainty rises due to increased demand. However, since Trump’s return to the White House in 2025, global policy uncertainty has increased significantly, with the US dollar index falling by 9.4% cumulatively, marking the worst annual performance since 2018, with a drop of over 10% in the first half of the year. Most non-US currencies appreciated against the dollar last year, benefiting RMB from the dollar’s weakness.

Recently, the outbreak of US-Iran conflicts caused the US dollar to appreciate. Guo Tao believes that the US-Iran conflict exceeded expectations, but the dollar still meets safe-haven demand. So far, the rebound of the US dollar has had limited overall impact on the RMB exchange rate trend.

Guo Tao points out that the key internal reason for this round of RMB appreciation is the solid economic performance providing fundamental support. Last year, China’s economy successfully achieved the annual growth target of around 5%, and the trade surplus for the year exceeded 1 trillion USD for the first time, providing strong support for the RMB’s appreciation against the trend. Additionally, new highlights have emerged in China’s macro narrative, such as DeepSeek, humanoid robots, and overseas expansion of innovative drugs, boosting market confidence.

RMB appreciation is a market choice, and bilateral exchange rate fluctuations are normal

On March 2nd, the People’s Bank of China lowered the foreign exchange risk reserve ratio for forward sales from 20% to 0%, temporarily halting the rapid appreciation trend of the RMB. Currently, China’s exchange rate remains a managed floating system, maintaining stability around a “reasonable and balanced level.”

Guo Tao emphasizes, “In the long run, a strong economy means a strong currency,” and RMB appreciation stems from economic fundamentals and market forces, not policy choices. In the short term, many factors influence exchange rates, and most of these factors coexist, with the RMB “referencing a basket of currencies for adjustment” only as a guideline.

What is the “reasonable and balanced exchange rate level”? Guo Tao states that a balanced exchange rate is an intuitive concept that cannot be precisely expressed. Different models produce varying quantitative results, and the market exchange rate cannot automatically stabilize at the equilibrium level; it will fluctuate around it. Therefore, exchange rate forecasts are inherently uncertain, and bilateral fluctuations are normal. In a highly market-oriented environment, exchange rates are prone to overshoot, leading to excessive appreciation or depreciation away from fundamentals. Moreover, exchange rates exhibit multiple equilibria: given the fundamentals, they can both appreciate and depreciate.

The inverted interest rate differential between foreign and domestic currencies suggests a need for depreciation. “In 2013, Japan launched quantitative and qualitative easing, driven by interest rate differentials, leading to yen depreciation. But in early 2016, Japan introduced negative interest rates, and driven by safe-haven demand, the yen appreciated,” Guo Tao explains.

For countries with floating exchange rates, Guo Tao believes that central banks generally do not pay close attention to the specific level of the exchange rate. They only intervene when fluctuations impact monetary policy transmission (such as price stability) or financial stability. China’s central bank continues to play a market-regulating role and will take measures when necessary to guide and stabilize market expectations, preventing excessive bilateral overshoot of the RMB.

Short-term measures to prevent RMB from appreciating too quickly and to maintain exchange rate flexibility as a “shock absorber”

At the recent Two Sessions, the government work report reiterated the goal of “keeping the exchange rate basically stable at a reasonable and balanced level.” The Central Economic Work Conference for the fourth consecutive year emphasized “keeping the RMB exchange rate at a reasonable and balanced level.”

Guo Tao believes that previous exchange rate stabilization mainly aimed to prevent excessive depreciation of the RMB. Currently, efforts are being made to prevent excessive appreciation. “The PBOC’s reduction of the foreign exchange risk reserve ratio clearly indicates a desire to prevent the RMB from rising too fast, but overall, the RMB remains resilient compared to other currencies, and the midpoint rate has recently appreciated further.”

China’s long-term structural trade surplus does not necessarily mean RMB appreciation. As mentioned earlier, the exchange rate has multiple equilibria. Between 2012 and 2025, there were ten years with significant trade surpluses compared to the previous year, with RMB appreciation and depreciation occurring in equal measure. However, Guo Tao notes that once an appreciation environment is established, expanding trade surpluses and RMB appreciation expectations can reinforce each other, increasing upward pressure.

Furthermore, China’s external asset and liability structure has gradually improved, shifting from “official net assets and private net liabilities” to “both official and private net assets.” Guo Tao believes this external structure helps curb depreciation fears but can also trigger appreciation expectations. The excessive yen appreciation in the late 1980s and early 1990s serves as a cautionary example.

In the context of trade surpluses and private external net assets, RMB appreciation can have a tightening effect on the macroeconomy. For example, in the first two months of this year, China’s trade surplus measured in RMB increased by more than two percentage points less than in USD terms. China is implementing more proactive macro policies and counter-cyclical adjustments, and rapid RMB appreciation would increase the demands on fiscal and monetary policy countermeasures.

Guo Tao believes that expectations of currency appreciation or depreciation are often related to the lack of exchange rate flexibility. “If the market believes the exchange rate should rise and it doesn’t, there will be upward pressure; similarly, if it should fall, downward pressure exists,” he explains. When exchange rates have elasticity, they can act as shock absorbers, help balance foreign exchange supply and demand, and expand monetary policy autonomy.

Although the RMB exchange rate remains a managed float, the degree of marketization or exchange rate elasticity is steadily increasing. Guo Tao cites an example from 2022, when due to aggressive tightening by the Federal Reserve, the RMB fluctuated between 6.30 and 7.30, but the bank’s foreign exchange settlement and sales only showed four months of small net deficits, with a significant reduction in annual surplus compared to the previous year. During the same period, the People’s Bank of China, facing Fed rate hikes and balance sheet reduction, lowered reserve requirements and interest rates to stabilize growth. This demonstrates that increasing exchange rate flexibility indeed helps promote balance of payments and expand monetary policy space.

The next focus of reform is to enhance market risk-neutral awareness

Regarding the next phase of exchange rate reform, Guo Tao mentions that one key point is to improve market risk-neutral awareness.

In 1994, China unified the official RMB exchange rate with the foreign exchange adjustment market rate, establishing the current managed floating exchange rate system based on market supply and demand, and set up the interbank foreign exchange market. In the 2005 “7.21” reform, China abandoned the RMB’s non-depreciation policy during the Asian financial crisis and began implementing a managed float based on market supply and demand, referencing a basket of currencies. However, “reference” does not mean “peg” to a basket; China’s legal exchange rate system remains a market-based, managed float. The August 11, 2015 reform improved the RMB’s central parity rate formation mechanism, with market makers referencing the previous day’s interbank closing rate, increasing marketization and benchmark transparency. Subsequently, in early 2016, China clarified that the RMB’s central parity rate is formed based on a “closing price plus a basket of currency exchange rate changes,” enhancing policy transparency and allowing moderate counter-cyclicality. In May 2017, a “counter-cyclical adjustment factor” was introduced into the central parity rate model.

After multiple rounds of reform, Guo Tao believes that China’s exchange rate marketization has accumulated rich experience. To advance RMB internationalization and further open capital accounts, the requirements for RMB market-oriented reform will increase.

He emphasizes that market participants’ risk-neutral awareness still needs to be strengthened. In mature markets, about 70% of foreign exchange transactions are derivatives, with only 30% being spot transactions. In China, the ratio is reversed: about 70% are spot transactions without risk hedging, meaning limited ability to resist foreign exchange risks.

Guo Tao suggests that foreign trade companies should incorporate risk-neutral concepts into normal business operations, control currency mismatches and exchange rate risk exposures, and include hedging costs in import-export pricing. Companies should also avoid speculative behavior, such as betting on unilateral appreciation or depreciation for profit.

“Promoting exchange rate marketization is also an opportunity to improve the homogenization and inward competition among foreign trade enterprises, shifting from quantity-based to quality-based competition,” Guo Tao states.

Regarding foreign exchange products and market participants, he recommends further diversification to meet different risk preferences, and to improve the principle of actual needs-based trading, relax foreign exchange trading restrictions, and fully meet the demand for forward hedging under capital accounts based on accrual accounting.

“When more enterprises participate in hedging, our market’s adaptability will improve, and the process of exchange rate reform can be advanced. This is a virtuous cycle,” Guo Tao concludes.

(Cailian Press, Yang Yijun)