The Yuan Just Broke 6.7. The Fed Wasn’t the Reason.

After Breaking Through 6.7: The RMB's Pricing Anchor Has Changed

On September 18, both the onshore and offshore RMB spot rates against the US dollar broke 6.70 during intraday trading. The offshore rate hit 6.6933. The onshore rate hit 6.6964. Both were the highest since February 2023. The central parity rate that day was 6.7521, up 59 basis points from the previous trading day. It was the eighth consecutive trading day of strengthening. This week, the central parity rate rose by a cumulative 222 basis points.

Three days earlier, the Federal Reserve raised rates by 25 basis points to 3.75%-4%. The US dollar index climbed above 100. The China-US interest rate differential inverted further. By rate-differential logic, the RMB should have weakened. It did not.

Wu Ge of Changjiang Securities attributed the divergence to market concerns about US fiscal sustainability and Federal Reserve independence. That explains the dollar side. Exports explain the RMB side.

In August, China's exports rose 25.0% year on year in US dollar terms, 1.1 percentage points faster than the previous month. In January-August, exports grew 19.3% cumulatively. In the first eight months, exports totaled RMB 20.17 trillion, up 14.6%. In August, commercial banks' net foreign exchange settlement surplus was USD 48.5 billion. In the first eight months, the trade surplus was USD 806.3 billion. The current account surplus in Q2 2026 was USD 195.1 billion. These figures are the most stable source of dollar supply in the foreign exchange market.

A Soochow Securities research note said the dollar supply from exporters' foreign exchange settlement is already enough to offset or even overwhelm outflow pressure from the financial account. Ming Ming of CITIC Securities put it more directly: the pricing anchor of the RMB exchange rate has shifted to the trade account. Strong exports and released settlement demand provide strong support. The impact of interest rate differentials has relatively weakened.

The central bank's operations during this round of appreciation had two parts: central parity guidance and reserve requirement changes. The central parity rate strengthened for eight consecutive days, a strong signal. But the central parity setting remains weaker than the market exchange rate. Soochow Securities found that the counter-cyclical factor turned systematically positive, guiding a smoother appreciation slope. Market supply and demand are pushing for moderate appreciation. The central bank is controlling the pace.

On March 2 this year, the central bank lowered the foreign exchange risk reserve requirement for forward foreign exchange sales from 20% to 0. This was the first use of the tool in nearly three and a half years. The policy intent included reducing companies' forward foreign exchange purchase costs. It also sent a signal to avoid overly rapid RMB appreciation. On September 10, Lu Lei, deputy governor of the central bank, said China has no need and no intention to gain trade competitive advantage through currency depreciation.

A deeper change comes from supply chains. Reuters reported in September on several cases. A US customer of a metal casting company in Dongguan shifted orders to India after the 2025 tariff shock. It later returned to China with new orders because of local production problems. The company's vice president said China's supply chain advantages remain too large, and replicating domestic production elsewhere is very difficult. Target returned some orders to Chinese suppliers. Shein scaled back part of its Vietnam operations. An outdoor furniture exporter in Hangzhou closed a workshop opened in Ho Chi Minh City in 2024 and moved production back to China. It could not find the needed equipment. Even screws and molds had to be imported from China.

The Economist Intelligence Unit estimates that China faces an effective US tariff rate of about 20%, Vietnam 6.1%, Indonesia 13.4%, and Thailand 4.5%. As Washington extends tariffs to a broader range of countries, the gap is narrowing. Some Chinese manufacturers are reassessing overseas investment. The "China Plus One" strategy is hard to implement. It often ends up as "China Plus One Plus China."

The impact of RMB appreciation on exports is overestimated. The share of exports to the US fell from 20.7% in September 2018 to 9.17% in Q1 2026. Export destinations have diversified. The RMB's real effective exchange rate remains near a two-decade low. Goldman Sachs estimates that in 2026 the RMB's nominal effective exchange rate will appreciate about 3%. Because China's inflation is lower than that of major trading partners, the real effective exchange rate will appreciate only about 1.5%. The negative impact on GDP growth will be about 10 basis points. In 2026, the RMB accounted for 52.9% of cross-border payments and receipts, 1.3 percentage points higher than the full year of the previous year. Shan Hui, chief China economist at Goldman Sachs, said China's continued strong export growth and gradual RMB appreciation can be compatible.

For the outlook, institutions lean toward appreciation. HSBC raised its year-end forecast from 6.75 to 6.65. Goldman Sachs has a 12-month target of 6.50. Deutsche Bank adjusted its end-2026 baseline from 6.7 to 6.55. Soochow Securities expects two-way fluctuation around a 6.60-6.75 center in Q4 2026, and 6.63 in the neutral scenario by end-March 2027. These forecasts assume gradual appreciation. None assume rapid strengthening.

The central bank has tools to smooth the pace. The central parity rate remaining weaker than the market rate indicates a preference for gradual appreciation. Three variables matter. First, whether export growth can be sustained. If cumulative growth falls below 5%, the appreciation logic weakens, and the policy balance will tilt toward protecting exports. Second, the Federal Reserve's policy path. If rate hikes exceed expectations, short-term dollar strength will create periodic pressure. Zhang Ming of the Chinese Academy of Social Sciences believes the dollar index will likely fluctuate in a two-way range of 97-103 in the second half of 2026, with a low probability of sustained large gains. Third, the convergence pace between the central parity rate and the spot rate. Khoon Goh of ANZ said that if the central parity rate continues its recent trend, the RMB may appreciate further. The central bank's willingness to control the pace of appreciation is equally clear.

The pricing logic of the RMB exchange rate is being reshaped. In the past, the market used China-US interest rate differentials, the dollar index, and capital flows to explain movements. In 2026, export competitiveness and the trade surplus explain movements better. Wu Ge said that against the backdrop of strong foreign trade, China's exports may surpass domestic fundamentals and become the core variable driving the exchange rate. Whether this logic continues depends on whether China's exports can maintain competitive advantage amid the restructuring of global trade. Current data and industrial trends lean toward a positive answer.