RMB appreciation: why now, how far it can go, and will it boost domestic consumption?
Synthesizing analyses from Baiguan's experts and partners
The recent RMB appreciation is a topic we’ve been closely tracking over the past two weeks. We’ve already published two podcast episodes on the subject (EP36 with Johnny Zou, EP37 with João Philippe de Orléans e Bragança), bringing in different perspectives from friends of the channel. At the same time, our partners — including CF40, Horizon Insights, and Ratingdog — have shared a range of thoughtful and sometimes contrasting views.
This article is an attempt to put all of that together. Rather than reacting to individual takes or isolated data points, I want to take a step back, map out what the different voices are really arguing, and then lay out our own view on this “multi-trillion-yuan” question. The goal here is simple: to build a coherent mental framework before news headlines take over - when eventually RMB prints the 6-handle - and before we are swept into whatever narrative the market decides to run with next.
The questions I want to answer are straightforward:
Why is RMB appreciating, why now?
Will RMB appreciation boost China’s domestic consumption?
Should RMB appreciate, looking from the perspective of China?
How far will RMB appreciate?
Why the RMB is appreciating in the first place
At the most basic level, currencies don’t float in a vacuum. Over long periods, they tend to reflect relative price levels, productivity, and the structure of an economy, even if short-term movements are dominated by capital flows and policy choices.
Seen from that angle, the RMB’s recent strength is not mysterious. Fundamentally, it reflects one simple fact: China has become cheaper in real terms.
Over the past several years, China has experienced very low inflation — and in some sectors, outright deflation. Over the same period, most of the world has gone through sustained inflation. That divergence matters. Even if the nominal exchange rate does not move, relative prices do. And in China’s case, relative prices have moved decisively downward.
This point has been articulated from different angles. Weijian Shan, acclaimed book author and executive chairman of PAG, recently pointed out that:
The Economist’s Big Mac index shows that a McDonald’s Big Mac costs $6.01 in the US, yet only Rmb25.5 (about $3.60) in China, implying the renminbi is roughly 41 per cent undervalued. This light-hearted burger benchmark closely tracks the IMF’s more formal purchasing power parity estimate, which indicates that the renminbi is about 50 per cent undervalued against the dollar.
CF40’s comprehensive study comparing price levels across multiple countries also confirms the same point. When you stop looking at nominal, exchange-rate-converted spending and instead map China’s actual consumption basket into other countries’ price systems, Chinese households are consuming far more in real terms than headline data suggests. The implication is straightforward: China’s price level — and by extension its real exchange rate — is systematically undervalued.
This has two important consequences. First, Chinese goods become more competitive globally without needing an explicitly weaker currency. Second, the real exchange rate quietly depreciates, even if the headline exchange rate looks stable. Joao’s calculation shows that RMB has depreciated 15% in real terms compared with the currencies of main trading partners compared with the pre-Covid level.
In that sense, the RMB has been cheap in real terms for a while. What we are seeing now is less a new story than a delayed recognition of an old one.
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Why is this happening now?
If China has been cheap for years, then why has the RMB appreciated only recently?
A large part of China’s foreign-exchange dynamics is shaped by exporter behavior. Exporters earn foreign currency and then decide whether to convert it back into RMB or keep it offshore. That decision depends not just on interest-rate differentials, but on beliefs about where the currency is headed — and how policymakers will react.
For a long time, holding dollars offshore made sense. USD yields were higher, and the risk of RMB weakness always loomed in the background. Depreciation felt like the path of least resistance.
Yet, since around May, the PBoC’s daily fixing has consistently leaned stronger than market expectations. Not aggressively, not dramatically — but persistently. In a managed system, this change of course matters. It sends a signal that depreciation is no longer being passively tolerated, and that appreciation is at least acceptable. And once firms begin to think that depreciation is no longer guaranteed, behavior adjusts.
In a recent research report titled “Asset allocation strategy under a “transition appreciation” scenario“, Horizon Insights, our partner research house, called the current round of appreciation “the transition appreciation“. What they means is that this round of appreciation unfolds within the broader context of a fundamental structural transition of the Chinese economic engine from real estate & cheap exports, to high-end manufacturing & global expansion of Chinese brands. (We featured this point in our first collaborative essay with them.)
According to Horizon Insights, Chinese exporters have begun converting more of their foreign-currency earnings back into RMB:
Corporates have shifted away from their earlier, defensive practice of hoarding U.S. dollars and have instead begun converting foreign-currency proceeds back into RMB on a large scale. In September alone, banks recorded a net FX settlement surplus of USD 51.7 billion — a strong single-month figure that reversed the earlier weakness. On a cumulative basis, banks posted a net FX settlement surplus of USD 117.5 billion over the January–October period in 2025.
and very crucially:
The RMB that firms convert back onshore is not flowing into time deposits, but is instead sitting in demand deposits — what is typically referred to as M1.
The M1–M2 gap had been trending higher since 2018, reaching elevated levels, with the only meaningful interruption occurring during the post-Covid recovery in 2020. Outside of that period, the upward trend largely persisted.
Since September 2024, however, the M1–M2 year-over-year growth rate gap has narrowed sharply, falling from 5.6% in May to 3.2% in July and further to 1.2% by September. At the same time, the growth rate of time deposits (M2) has slowed from a peak of around 20% in 2023 to roughly 10% today, with clear deceleration at the margin. In other words, “active money” is increasing: funds are moving rapidly out of time deposits (M2) and into demand deposits (M1).
(We have featured some of Horizon Insights’ work for several times now. It is perhaps China’s only independent sell-side research house now that has lived through several market cycles. If you are interested in getting a copy of their report, please contact us at baiguan@bigonelab.com)
João also captures the micro logic succinctly. An exporter can earn 4–5% in dollars, but now faces a realistic chance of 2–3% RMB appreciation, then holding dollars offshore is no longer obviously superior. The one-way bet disappears, and with it the incentive to hoard USD.
So now the question is: why is the PBoC comfortable allowing this shift now?
A big part of the answer lies outside China.
Lately, diplomatic frictions and disputes around trade imbalances have intensified for China, and a persistently large surplus has become increasingly difficult to explain away as a cyclical phenomenon. In that context, allowing even modest RMB appreciation carries signaling value and helps softens the narrative that China is deliberately relying on currency weakness to export deflation. This move does not need to be large to be noticed; the direction alone already matters.
At the same time, the broader geopolitical backdrop has become marginally more forgiving. A tentative U.S.–China détente — however fragile — reduces the risk of policy backfire when China is in a vulnerable position.
The monetary backdrop also plays a role. The Fed has moved decisively away from the relentless tightening that defined the previous phase. That shift narrows interest-rate differentials, both realized and expected, and reduces the penalty for holding RMB relative to dollars.
More broadly, as João reminded us, the dollar itself has been exceptionally strong for a very long time. A strong dollar environment makes it difficult for almost any currency — especially one as managed and politically sensitive as the RMB — to strengthen meaningfully. When the dollar dominates global liquidity and capital flows, resisting depreciation becomes the primary objective; appreciation is simply not on the table. As that dollar strength begins to decline this year, that constraint also loosens.
Put together, the timing makes sense. A structurally cheap real exchange rate meets a marginal shift in expectations, in an external environment that is less hostile than before.
Why RMB appreciation won’t meaningfully boost domestic consumption
One of the more controversial arguments around a stronger RMB is that it will boost domestic consumption. This is one of the arguments made by Weijian Shan in the Financial Times opinion.
In theory, there are several pathways through which this could occur. A stronger currency makes imports cheaper, raises real purchasing power, and may lift confidence at the margin, potentially encouraging households to spend.
Horizon Insights argues that under its “transition appreciation” framework, RMB strength could help transmit export momentum into domestic demand in two ways. First, exporters’ foreign-currency earnings are converted back onshore, liquidity shifts from time deposits to demand deposits, and financial conditions at the margin become more supportive. Second, improved profitability in export-oriented manufacturing could, over time, translate into higher wages and more stable employment, allowing income gains to spill over into consumption, especially service consumption.
Whether these mechanisms are strong enough to materially change China’s consumption dynamics, however, remains far from certain. The main problem, in my own opinion, is that the foreign exchange is not where China’s consumption constraint actually lies.
China’s consumption problem is about confidence, income expectations, and balance sheets. Households are not holding back because imported goods are expensive. They are holding back because future income feels uncertain, because property prices no longer provide a sense of security, and because any excess income is automatically routed into precautionary savings. These are balance-sheet and institutional issues, not FX issues. So I can’t see a modest change in the exchange rate does anything meanintful to alter those calculations.
There is also a second-order effect that often gets ignored. In an economy where exports are still playing a stabilizing role, currency appreciation can in fact squeeze exporters’ margins. When margins are thin — as they are for many manufacturers — that pressure shows up quickly in hiring decisions, wage growth, and investment plans. So instead of increasing wages and boosting employment, a ill-timed appreciation could actually do the exact opposite.
Horizon Insights explicitly warns about this trade-off:
If the recovery in manufacturing profits fails to translate into meaningful gains in employment and wage growth, the capital-for-labor substitution inherent in industrial upgrading will further slow the pace of household income improvement. This can produce a widening “scissors gap,” in which corporate conditions improve while consumption recovery remains weak, making it difficult for external demand momentum to naturally convert into domestic demand momentum.
So while RMB appreciation may marginally improve purchasing power at the edges, it does not address the core forces suppressing consumption, and may even harm domestic demand if not handle properly.
Should the RMB appreciate further from China’s perspective?
There are genuine benefits to RMB appreciation.
A stronger RMB eases external pressure around trade imbalances and “exporting deflation” narratives. It encourages firms to compete on productivity rather than currency tailwinds. It also improves confidence at the margin by reducing the perceived risk of disorderly depreciation and rebuilding the confidence that China’s nominal GDP catch-up game with the US is resuming — a point that João also emphasized.
But the risks are equally real.
China is still in a delicate phase of adjustment. Domestic demand is weak. The property sector is not fully stabilized. Exports remain one of the few areas providing momentum. In that environment, aggressive appreciation risks weakening a functioning part of the economy without fixing the part that is broken.
Ratingdog, another partner of us and the new sponsor of S&P China PMI indices (previously known as Caixin PMI) recently published a insightful short note on their WeChat blog about this topic. Summarising Nomura’s recent research, Ratingdog was quite blunt in pointing out that people seems to be confused about the cause and effect between a strong trade surplus and the currency exchange rate:
China’s massive trade imbalance does not stem from an undervalued nominal RMB exchange rate, but rather from severely weakened domestic demand and persistent deflation — both of which are rooted in the collapse of the property bubble. What truly underpins China’s export competitiveness is an advantage in the real exchange rate: domestic price declines in China — reflected most clearly in persistently negative PPI — stand in sharp contrast to inflation in overseas markets.
Cautions should be taken against attempts to address the trade surplus by pushing for nominal RMB appreciation. Such a strategy risks hitting exports without resolving the underlying problem, thereby intensifying deflationary pressures and pushing the economy into a deeper bind. …
The policy focus must shift from the external to the internal. Ending deflation requires reviving domestic demand. This entails, first, taking decisive steps to clean up the disorder in the property market and restore confidence. More importantly, it calls for structural reform of the social welfare system — such as significantly raising pension benefits for rural residents — to directly stimulate consumption, reduce precautionary savings, and create a more sustainable and balanced growth dynamic. This, the report argues, represents the most effective path out of the current predicament and toward economic rebalancing.
How far can the RMB realistically go?
The reasoning above naturally puts a ceiling on how much appreciation is likely in the next on year. What matters is probably not how much RMB should appreciate, but how much appreciation the system can absorb without destabilizing exports, employment, or expectations.
The answer appears to be: perhaps, not a lot.
Crucially, China does not need large appreciation to achieve most of the signaling benefits people talk about. Breaking the narrative of one-way depreciation already does much of the work. Reducing tail-risk perception already helps markets. Beyond that, the marginal gains diminish quickly, while the risks rise.
That is why the most plausible path is gradual, limited appreciation — carefully managed, always reversible if conditions change. And the more the currency strengthens, the stronger the incentive for policymakers to lean against it if the domestic demand situation does not materially improve.
The more pressing issue, as laid out by folks at Ratingdog and Nomura, would involve how to really boost domestic demand and restore confidence, a topic I would try to answer in a future post.