CITIC Securities: This round of RMB appreciation is different from any previous one in history

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Research by CITIC Securities | Gao Yusong, Chen Zeping, Qiu Xiang

From a strategic perspective, many signs indicate that this round of RMB appreciation is different from any previous cycle. The increasing ability of Chinese companies to earn foreign exchange abroad, the global distrust in the US dollar and demand for currencies backed by tangible assets, and China’s top-level policies on external “taxation” and subsidies to boost domestic demand form the underlying logic of this RMB appreciation cycle. Factors like the dollar’s trend, Fed chair changes, and foreign capital flows are unlikely to completely reverse the appreciation trend. Over the past 20 years, seven RMB appreciation cycles, exchange rates have not been the decisive factor in industry allocation. However, during the early stages of a sustained appreciation expectation or when exchange rates hit key levels, market trading may mimic muscle memory; additionally, about 19% of industries could see profit margin improvements due to appreciation, and companies accelerating capacity overseas may be less negatively impacted by RMB appreciation. Policies aimed at curbing rapid unilateral appreciation, such as monetary easing or moderate loosening of foreign financial investment restrictions, are actually more influential on industry allocation. The different underlying logic of this appreciation cycle suggests that allocation strategies should differ from historical experience, focusing on three clues: short-term muscle memory, profit margin changes, and policy shifts. We have considered ten key questions about RMB appreciation for investors’ reference.

▍What signs show this RMB appreciation cycle is different from previous ones?

We believe that this RMB appreciation cycle, starting in Q2 2025, is unlike any previous cycle. Compared to the past seven cycles, this one shows some unique signs: Hong Kong stocks are not performing strongly, market expectations for the “East rising, West falling” of China and the US are not high, foreign capital continues to flow out of A-shares, and the phase strength of the US dollar index cannot change the RMB appreciation trend. Historically, these signs appearing together are rarely associated with sustained RMB appreciation. This indicates that the driving factors and allocation ideas behind this cycle differ from past experiences, and simple extrapolation based on history may be less effective.

▍From a strategic perspective, what factors are driving this RMB appreciation that differ from previous cycles?

First, Chinese companies’ increasing overseas earnings capacity has led to a large foreign exchange settlement demand. According to the General Administration of Customs, China’s trade surplus in 2025 reached $1.1889 trillion, a 19.78% YoY increase, hitting a record high. More importantly, export companies’ willingness to settle foreign exchange is rising; by December 2025, the surplus converted into actual foreign exchange receipts exceeded 110%, a major difference from the past. Since 2022, we estimate that the accumulated pending foreign exchange for exporters is about $1.1 trillion. Once RMB appreciation expectations form, the inflow of overseas funds will reinforce this positive feedback loop.

Second, global speculative capital demand for tangible assets is also increasing, driven by concerns over dollar creditworthiness. For example, since 2025, whenever the Crypto Fear & Greed Index approaches panic levels, the holdings of SPDR Gold ETF have surged. Assets like container ships that generate real cash flow are also gaining favor among crypto funds. Under the trend of tokenizing physical assets, RMB, as the currency of the world’s largest manufacturing (physical production) and commodities (physical consumption) country, is expected to be revalued continuously in the future.

Third, China has the ability and willingness to “export inflation.” Its foreign trade policies are shifting from simply expanding scale to stabilizing supply chains, protecting profits, and managing risks. Leading industries are transitioning from external “subsidies” to external “taxation,” which benefits the profitability of outbound companies and enhances the attractiveness of high-quality Chinese assets to global investors, thereby continuously increasing genuine demand for RMB.

▍Will Fed Chair Powell’s nomination and strong dollar expectations reverse RMB appreciation?

We believe Powell’s appointment may promote a “de-leveraging” policy approach focused on “shrinking the balance sheet + lowering interest rates,” but it’s unlikely to be classified strictly as hawkish or dovish. The implementation of such policies may face constraints, and we expect gradual rather than abrupt shifts. While Powell’s actions may have short-term market impacts, they will not alter the long-term asset logic. More importantly, this RMB appreciation cycle is fundamentally different from previous ones, driven by Chinese companies’ rising overseas earnings, global distrust in the dollar, demand for tangible assets, and top-level policies on external taxation and subsidies. These factors will not be reversed by Fed chair changes or renewed dollar strength expectations. Additionally, factors like US-China relations in 2026, weakening external demand, large-scale foreign capital outflows, and PBOC monetary policies are unlikely to fully reverse the RMB appreciation trend.

▍What lessons can be learned from Japan’s yen appreciation in the 1970s-80s?

Yen appreciation in the 1970s-80s can be divided into two phases: before the Plaza Accord in 1985, driven by manufacturing upgrades and economic growth; after the agreement, into an uncontrollable acceleration. Rapid yen appreciation directly hurt export-oriented firms. According to Japan’s Ministry of Finance, Japan’s trade surplus fell 44.7% from 1986 to 1990; leading manufacturers were forced to go overseas, with foreign direct investment expanding sharply from $14.48 billion in 1986 to $48.02 billion in 1990, increasing their share of GDP from 0.28% to 1.42%. Domestic manufacturing gradually hollowed out. Meanwhile, yen’s increased purchasing power boosted imports, impacting domestic manufacturing and leading to market exit of less adaptable firms. The Bank of Japan’s “quantitative easing” and lack of effective restrictions on hot money led to capital flowing into stocks and real estate, creating a vicious cycle of “industry migration → capital speculation → bubbles.” Long-term, this resulted in the “Lost Thirty Years,” with Japan’s industrial share in GDP dropping from 42.9% in 1970 to 28.6% today. The lessons include the risks of aggressive monetary easing, unrestrained capital inflows, and delayed cooling measures, which caused manufacturing hollowing out and significant damage to industrial vitality.

▍Why has Hong Kong stocks underperformed in this RMB appreciation cycle compared to history?

In previous seven RMB appreciation cycles, the CFETS spot exchange rate appreciated by an average of +7.1%, while the Shanghai Composite rose +9.1% and the Hang Seng Index +17.1%. During RMB appreciation, Hong Kong stocks generally performed better. As of 2024 annual report, 49.2% of Hong Kong-listed companies use USD or HKD as their functional currency. RMB appreciation boosts their value through currency translation and asset revaluation, and the highly open capital market attracts foreign inflows, resulting in stronger price elasticity. However, in this cycle, major Hong Kong stocks underperformed, with real estate, energy, and other heavy-asset sectors still unstable. The appreciation’s amplifying effect on assets and profits is limited. Additionally, the “East rising, West falling” logic is less relevant now, and persistent low profitability, along with underwhelming Q3 2025 results from top internet and auto companies, has dampened market enthusiasm. These factors collectively explain the subdued performance of Hong Kong stocks during this appreciation cycle.

▍Looking back over the past 20 years, is the exchange rate the decisive factor in industry allocation?

Reviewing the seven RMB appreciation cycles over the past 20 years shows that industries performing well during each cycle vary. These industries typically benefit from exchange gains, cost savings, macroeconomic recovery, or liquidity premiums from foreign capital inflows. However, over longer periods, RMB appreciation is mainly a pricing outcome or narrative at specific stages, not the dominant factor in industry allocation. Sometimes, markets may trade based on macro logic—such as RMB appreciation benefiting import-dependent industries like airlines, paper, or gas—especially near initial or key levels, driven by familiar, easily understood macro themes. If an industry’s fundamentals are sound, the market may short-term trade on appreciation benefits, exemplified by sectors like airlines, paper, and gas, driven by “muscle memory.”

▍Which industries could see profit margin improvements from RMB appreciation based on cost-income analysis?

The impact of RMB appreciation on industry profit margins depends on the reliance on imported inputs and export outputs. Using 2023 input-output data for 211 sectors, about 62.5% are less affected by exchange rate changes, while roughly 19% could benefit from RMB appreciation. Beneficiary industries fall into four categories:

1. Upstream resources and raw materials—steel, nonferrous metals, oil & petrochemicals, basic chemicals (fertilizers, coatings, fibers, plastics), building materials (refractory materials), electronics (semiconductor materials);

2. Domestic consumer goods—agriculture, forestry, animal husbandry, feed, vegetable oils, sugar, light industry (paper, paper products), consumer electronics;

3. Service-related sectors—electricity and utilities (gas), transportation (shipping), retail (imported cross-border e-commerce), social services (inspection, industrial design, vehicle and electronics repair);

4. Manufacturing equipment—machinery (metal products & processing equipment), electronics (semiconductor equipment).

▍How do policies to curb rapid appreciation affect industry allocation?

To prevent excessive appreciation, the central bank may face challenges in 2026. Rapid RMB gains could trigger speculation, damaging manufacturing competitiveness. Policy options include:

• Moderate monetary easing to lower real interest rates, which could be more feasible in 2026, stimulating domestic demand and market growth;

• Relaxing restrictions on foreign financial investments by domestic institutions and residents, diversifying asset allocation and boosting expected returns, helping Chinese wealth management firms go global, and opening new growth avenues for securities and insurance sectors.

Additionally, industry policies may also be employed to mitigate the negative effects of RMB appreciation on affected sectors.

▍Are companies accelerating capacity overseas less negatively impacted by RMB appreciation?

In recent years, Chinese manufacturing firms have accelerated capacity expansion abroad. From 2023 to 2025, 107, 117, and 146 non-sales companies explicitly announced overseas investment and factory construction. The profit characteristics of these firms cannot be fully explained by “domestic production + global sales,” and their exchange rate exposure differs from typical exporters. Analyzing companies with over $100 million in outward investment from 2015-2023 shows a more pronounced negative correlation between net profit growth and USD/RMB exchange rate, especially before the US-China trade war. Successful large-scale overseas capacity deployment usually involves significant competitive advantages—technological leadership, supply chain efficiency, strong branding or customer relationships—forming industry alpha (competitive barriers) that outweigh macro beta (exchange rate losses). Therefore, leading outbound firms’ profitability is less negatively affected by RMB appreciation.

▍What investment clues can be drawn under the continuous RMB appreciation environment?

If RMB continues to appreciate, investment strategies can focus on three clues: short-term muscle memory, profit margin changes, and policy shifts.

1. Short-term muscle memory: Historically, industries like airlines, gas, and paper show obvious stock price elasticity during appreciation phases, especially near key levels, driven by intuitive market reactions.

2. Profit margin changes: Industries with high reliance on imported raw materials and low export dependence—such as upstream resources, agriculture, shipping, cross-border e-commerce, and machinery—may see significant profit margin improvements due to cost savings during sustained appreciation.

3. Policy-driven: Beneficiaries of potential monetary easing or relaxed cross-border investment restrictions—such as tax-exempt sectors, real estate developers, securities, and insurance—may experience valuation boosts.

▍Risks:

Escalation of US-China technology, trade, and financial frictions; conflicts in Russia-Ukraine, Middle East; macro liquidity tightening domestically and abroad; policy implementation or economic recovery falling short of expectations; unresolved real estate inventory issues.