Will CNY appreciation continue in 2H?

Research evidence excerpt

Will CNY appreciation continue in 2H?

This is because a large part of China's trade surplus is not converted into yuan but held as dollar assets, which we call the

yuan carry trade, i.e., exporters keeping earnings in USD to benefit from the yield gap and currency expectations. Over the

past five years, we estimate that exporters and multinationals have accumulated around US$800bn.

In other words, China's huge trade surplus doesn't imply that the CNY is on a sustainable appreciation trend. The key driver is

capital flows, and what drives capital flows is the US dollar.

2-speed growth is self-enforcing through the exchange rate

The root cause of China's 2-speed growth is the "Just Enough" rule, i.e., Beijing does just enough to achieve the growth target.

This means that strong exports reduces the urgency to support weak domestic demand. As a result,

• Weak domestic demand leads to capital outflows and thereby a weak yuan.

• A weak yuan supports exports, further reducing the urgency to boost domestic demand.

In this way, 2-speed growth becomes self-enforcing, until a sharp slowdown in exports breaks the loop.

Before that happens, the US-China yield gap will likely remain wide and the yuan carry trade will persist. In this case, the CNY

follows the broad direction of the US dollar, which we call passive appreciation (China Macro in 8 Terms - A Glossary of Our

Framework, 22 May 2026).

Conversion rate could fall if dollar strengthens

Some cite the rising conversion rate as evidence of a CNY trend appreciation. Indeed, the conversion rate under goods trade,

or the share of exporters' FX conversion relative to the goods trade surplus, has been rising. It reached 66% in Jan-May this

year, up from 44% in 2025 and 30% in 2024 (Fig 3).