What are the core driving factors behind the recent continuous appreciation of the RMB?
How does the mild appreciation of the RMB affect the pace of foreign capital inflows into the Hong Kong stock market and sector allocation preferences?
As the year-end approaches, trading activity in the Hong Kong stock market has become relatively subdued, but overall sentiment is not pessimistic. China Merchants Securities believes that multiple positive factors are accumulating: the 'crowding-out effect' of southbound capital flows is gradually easing, the pace of IPOs is slowing, the pressure from the lifting of share lock-ups is being released in stages, and there is marginal improvement in overseas liquidity. As a result, the Hong Kong stock market is expected to stabilize and usher in a 'year-end rally.'
The exchange rate of the RMB against the US dollar has recently strengthened significantly, with both offshore and onshore RMB breaking through the 7.05 level, reaching a new high in nearly 14 months. This round of appreciation is not accidental but rather the result of multiple fundamental factors resonating together.
Why does the RMB continue to appreciate?
Trade surplus hits a record high
In the first 11 months of 2025, China's cumulative trade surplus reached US$1.08 trillion, a year-on-year increase of approximately 21%, making it the first country in the world to achieve a trade surplus exceeding US$1 trillion in a single year. The substantial surplus provides a solid foundation for the appreciation of the RMB.
Strengthened corporate FX conversion willingness
Export enterprises have accumulated significant amounts of US dollars. As the RMB broke through key psychological thresholds such as 7.10 and 7.05, coupled with the traditional 'FX conversion peak season' from December to before the Spring Festival, companies concentrated on converting their US dollars into RMB to meet year-end bonus payments, debt repayment, and financial arrangements for the coming year, further boosting demand for the RMB.
Passive appreciation due to the weakening of the US dollar
Following the realization of expectations for interest rate cuts by the Federal Reserve,$USD (USDindex.FX)$Since late November, it has continued to decline and has now fallen below 100, hovering around 98. Non-US currencies have generally rebounded, and the renminbi, as one of the major emerging market currencies, has also benefited from the overall weakening of the dollar.
Policy orientation shift
The Chinese government has recently reduced its direct intervention in the exchange rate. The reasons are as follows: on one hand, the trade friction between China and the United States has eased in the short term; on the other hand, China's export structure has shifted from low value-added products to high-tech fields such as new energy and high-end manufacturing, making it difficult to enhance competitiveness solely by relying on currency depreciation. Instead, the policy is more inclined to support specific export enterprises through targeted tools such as fiscal subsidies, while avoiding a vicious cycle of capital outflow and depreciation expectations caused by excessively lowering the exchange rate.
Future trend judgment: A moderate appreciation is the main tone.
The People's Bank of China reiterated in its latest monetary policy implementation report that "maintaining the basic stability of the RMB exchange rate at a reasonable and balanced level" remains a core objective. Looking ahead, the RMB is likely to maintain a moderate and gradual appreciation.
Supporting factors: Continuous trade surplus + the Federal Reserve entering a rate-cutting cycle → there is objective appreciation pressure on the Renminbi;
Restricting factors: Rapid appreciation may weaken the competitiveness of export enterprises, exacerbate deflation risks, and impact employment.
Therefore, the central bank will ensure that exchange rate fluctuations align with economic fundamentals through methods such as guiding the central parity, avoiding disorderly volatility.
The transmission effect on the Hong Kong stock market
The appreciation of the renminbi is gradually attracting global capital to increase allocations to Chinese assets. Last week, there were signs of net inflows of foreign capital into Hong Kong stocks. Although some capital with clear national backgrounds (such as certain American and Japanese institutions) has limited willingness to return to Hong Kong stocks due to geopolitical and investment review restrictions, profit-oriented market capital will still allocate based on long-term return logic.
It is worth noting that foreign capital generally adopts a 3-5 year assessment cycle, and its repatriation process will exhibit gradual and cautious characteristics, with the core focus being whether listed companies possess: a sustainable business model; continuous improvement in profitability; and solid competitive barriers.
Structural opportunities: Which sectors benefit?
The appreciation of the renminbi has a distinct impact on different industries, and it is recommended to focus on the following beneficial directions:
Airline
Airlines generally hold a large amount of aircraft leasing liabilities denominated in US dollars. The appreciation of the renminbi will directly bring exchange gains while reducing the cost of aviation fuel priced in US dollars. In the Hong Kong stock market, companies like Air China with a high proportion of US dollar liabilities will particularly benefit.
Raw material import-oriented manufacturing industry
Industries such as papermaking, petrochemicals, and non-ferrous metals largely rely on overseas procurement for their raw materials, while their products are mainly sold in the domestic market. The appreciation of the Renminbi effectively reduces import costs and enhances gross profit margins.
Financial stocks
The attractiveness of RMB assets is increasing, which helps to enhance the asset valuations of financial institutions such as banks and insurance companies. Especially from the perspective of Hong Kong dollars or US dollars, the "gold content" of their balance sheets is improving. In addition, foreign capital prefers large financial stocks with good liquidity and stable performance.
High Dividend H Shares
For Hong Kong-listed companies whose main business is in the mainland, the appreciation of the RMB means that the profits and dividend amounts converted into Hong Kong dollars increase, resulting in a higher actual dividend yield for investors and enhancing the attractiveness of the allocation.
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Editor/melody