From February 16 to 20, the offshore RMB briefly touched 6.88, while the onshore rate held firm around the 6.89 level. Since the beginning of February, the RMB has appreciated by nearly 1.3%. Meanwhile, the dollar index has rebounded by almost one percentage point from its lows. This unusual divergence — a stronger RMB despite a rising dollar — has been rare over the past three years. What is driving this phenomenon?

Reason One: An Exceptionally Strong Lunar New Year Settlement Wave

Each year before the Lunar New Year, export-oriented companies engage in concentrated foreign-exchange settlement — converting U.S. dollars into RMB to pay year-end bonuses, settle invoices, and prepare working capital for the new year. This year, however, the scale has been unusually large.

In January, bank foreign-exchange settlements reached 2.04 trillion RMB, setting a record monthly high. By the end of January, foreign exchange reserves had increased by 41.2 billion U.S. dollars compared with the end of December. Wang Qing, Chief Macro Analyst at Golden Credit Rating, noted that increased corporate settlement demand ahead of the holiday led to seasonal RMB strength. In particular, as the RMB has continued to appreciate against the dollar recently, accumulated settlement demand from earlier strong export growth may be accelerating.

Over the past two years, China’s exports have been exceptionally robust, leaving companies holding substantial dollar balances. Many had delayed conversion, betting on further RMB depreciation. Now that the trend has reversed, firms are effectively “short-covering,” creating a self-reinforcing cycle: the stronger the RMB rises, the more companies convert dollars; the more they convert, the stronger the RMB becomes.

Reason Two: A Record Trade Surplus

Seasonal factors explain only short-term momentum. What truly gives the market confidence to go long RMB even during a dollar rebound is last year’s remarkable trade performance.

In 2025, China’s goods trade surplus exceeded one trillion U.S. dollars for the first time, reaching 1.076 trillion, up 21.7% year on year. The sheer volume of foreign exchange earnings provides a solid foundation for RMB strength. Ding Shuang, Chief Economist for Greater China and North Asia at Standard Chartered, wrote that supported by economic fundamentals and external competitiveness, the RMB exchange rate is likely to remain firm.

Importantly, the structure of the trade surplus is improving. The “new trio” — electric vehicles, lithium batteries, and photovoltaic modules — continue to post rapid export growth, with higher value-added products accounting for an increasing share. This suggests that even if global demand fluctuates in the future, China’s export moat is deeper than before.

Reason Three: Relative Dollar Weakness

The RMB’s strength is driven partly by domestic fundamentals and partly by relative dollar softness. Although the dollar index rose by 0.9% between February 16 and 20, over a longer time frame it remains in a weaker trend channel.

Two factors are behind this: rising expectations of Federal Reserve rate cuts and internal turbulence at the Fed. The U.S. Department of Justice has recently launched a criminal investigation into Fed Chair Powell, raising concerns about central bank independence. Meanwhile, leading candidate Warsh has advocated a combination of rate cuts and balance-sheet reduction, which has yet to reverse the dollar’s broader weakness. RMB appreciation has been supported by a softer dollar and rising expectations of Fed easing.

The inverted interest rate differential between China and the United States has narrowed significantly. The previous logic that “holding dollars in bank deposits offers better returns” is gradually losing validity. Global capital has begun reducing exposure to certain dollar assets and reallocating toward more attractively valued emerging-market assets. As the core currency of emerging markets, the RMB has naturally become a favored destination.

Can the RMB Maintain Its Momentum After the Holiday?

At current levels, market views are beginning to diverge. Some analysts believe exports will remain relatively strong in the first quarter, with continued corporate settlement demand and elevated market sentiment. Given the limited likelihood of a sharp dollar rebound, they expect the RMB to remain firm after the holiday. Galaxy Securities, from a bond-market perspective, suggests that RMB appreciation may create room for monetary easing, with ten-year government bond yields fluctuating within a relatively narrow range.

However, more cautious voices warn that multiple factors could influence the RMB this year. While maintaining a bullish outlook, investors should not ignore potential headwinds. For example, if U.S. inflation rebounds unexpectedly and disrupts the Fed’s rate-cut path, the dollar could strengthen again. Alternatively, if export growth slows unexpectedly and the trade surplus narrows, pressure on the RMB could reemerge.

As of February 24, the marginal momentum from the settlement wave appears to be fading. With the holiday over and bonuses paid, much of the required conversion has likely already taken place. Nevertheless, the large stock of trade surplus, uncertainty surrounding the dollar, and a domestic policy focus on stable growth suggest that the RMB is unlikely to easily weaken back above the 7.0 level.