As the Federal Reserve cut interest rates by 25 basis points in September, international markets have become optimistic that narrowing interest rate differentials would drive U.S. capital flows into emerging markets, thereby easing capital outflow pressures in those economies. From the perspective of most research institutions, this logic should also apply to the Chinese yuan or renminbi (RMB). However, the Fed's rate cut has yet to yield any significant shifts.
The U.S. dollar index has rebounded slightly, while the RMB has hovered around 7.10, retracing the "sharp rise, gradual decline" pattern seen in early September, now trading around 7.11–7.12. Simultaneously, the yield on 10-year U.S. Treasury bonds has climbed to approximately 4.13%. Meanwhile, China's A-share market has not benefitted from the Fed's policy shift, instead showing signs of volatility.
Concerning these changes, many observers believe these developments reflect that markets had already fully priced in expectations of the Fed's rate cut, as seen in the RMB's earlier appreciation and stock market gains. After policy expectations materialize, markets often undergo corrections. This view is not without merit. Should the Fed resume its rate-cutting cycle, the narrowing U.S.-China interest rate spread would support further RMB appreciation. Drawing on past experiences of market trends, some market analysts suggest that a broader wave of foreign exchange settlement could emerge alongside a strengthening RMB. However, researchers at ANBOUND caution against overestimating the appreciation trend of the RMB or overly optimistic expectations that international capital inflows will drive rallies in the Chinese stock market or bonds. Global markets, including China, still face considerable challenges stemming from policy uncertainties and geopolitical tensions.
While the Fed's renewed interest rate cuts may ease pressure on the RMB and create a more favorable external environment for China's capital markets, the gradual pace of these cuts is likely to result in some market volatility. As long as the U.S. economy remains resilient, the dollar is unlikely to depreciate significantly. Fed Chair Jerome Powell recently reiterated that inflation is not expected to fall quickly. The current rate cut aims primarily to mitigate risks, particularly the threat of an economic slowdown driven by weakening employment, though Powell also acknowledged concerns about the potential for stagflation.
After the Fed's cut, the benchmark 10-year U.S. Treasury yield did not fall but instead rose to 4.14%, currently holding around 4.13%. The yield on the more rate-sensitive 2-year Treasury dropped more noticeably, now around 3.6%. Meanwhile, China's 10-year bond yield has risen slightly following the People's Bank of China (PBoC)'s rate cut in May and remains around 1.8%, showing little reaction to the Fed's policy shift. Taken together, these data suggest that markets had already digested the Fed's rate cut, with the RMB strengthening to around 7.1 in anticipation. The actual implementation of the rate cut has done little to further alter the U.S.-China rate spread. In other words, the RMB's future appreciation will be more related to the pace and extent of further Fed easing.
While rate cuts and a weakening dollar typically encourage capital flows into emerging markets, and some hedge funds have begun speculating on RMB appreciation, the actual spillover effect remains limited amid evolving global geopolitical conditions. Some funds have flowed into European and Japanese markets, but a larger portion remains in U.S. markets, driving structural shifts in U.S. equities and bonds. According to Crane Data, during the week of September 15–20, U.S. money market fund assets hit a record high of USD 7.7 trillion, with over USD 60 billion flowing into such funds in the first four days of the month. Despite new highs in U.S. equities spurred by the Fed's cut, the size of these near-cash assets has not declined.
On the one hand, many U.S. investors view equity valuations as overstretched; on the other, money market yields of 4.1% continue to offer considerable appeal. This dynamic suggests that even amid the protectionist policies under the Trumpist conservatism, the depth and stability of U.S. markets remain more attractive compared to those in emerging markets, Europe, or Japan. As a result, capital is moving across borders more cautiously. Though investors have growing concerns about the politicization of the Fed and the long-term stability of the dollar, few markets around the world offer a safe haven comparable to the U.S. The dollar's volatility continues to play a dominant role in driving the exchange rate movements of other currencies, including the RMB.
Guan Tao, Chief Economist at BOC International Securities, has analyzed cross-border flows in August and concluded that the RMB's spot appreciation during that month was not fundamentally driven. He noted that early-month gains were largely passive, stemming from the dollar's weakness, while late-month gains were led by stronger central parity guidance and improved market risk appetite. Guan further noted that, like the foreign exchange market, the rise in A-shares during August was primarily fueled by incremental capital and risk-on sentiment, rather than fundamental economic improvement. It should be emphasized that although there has been a "double rise" in stocks and foreign exchange in the country, the stock market rise cannot be attributed to the appreciation of the RMB exchange rate.
Despite stronger appreciation momentum in August, market participants have not built firm expectations of continued RMB strength, suggesting a need for a more rational view of the relationship between exchange rates and stock prices. As Guan observed, much of the foreign capital flowing into A-shares this year has actually stemmed from structural reallocations triggered by outflows from the bond market. The capital account overall has not shown substantial net inflows, indicating that the equity market gains are more about valuation recovery and improved liquidity than a broad-based bet on RMB appreciation. This points to continued investor caution regarding the RMB's future trajectory.
Current optimism surrounding the RMB largely stems from positive expectations about China's economic stability and market inertia. In particular, many investors attach broader implications to the currency's appreciation, such as anticipated improvements in the stock and real estate markets, which have also fueled short-term arbitrage activity. However, since the third quarter, slowing growth in consumption and investment signals that domestic demand remains under significant pressure, suggesting that the fundamental support for the RMB exchange rate is not yet firmly established. This casts doubt on the sustainability of any upward momentum in the RMB. Additionally, while the impact of the Trump-era tariff policies has been less severe than initially feared, the U.S.–China trade war persists, with the United States continuing to implement new trade barriers. These ongoing tensions further weigh on the stability of the RMB.
Ultimately, the RMB's exchange rate is underpinned by China's domestic economic fundamentals. As ANBOUND's founder Kung Chan emphasizes, the currency's movements, whether depreciation or appreciation, are mainly driven by internal stability. With China's economic strength growing and domestic demand gradually expanding, the RMB's credit foundation is being reinforced. The currency must prioritize internal equilibrium and adopt appropriate monetary policy measures. While Fed rate cuts and a weaker dollar alleviate some depreciation pressure and create more policy space for China, which is conducive to economic recovery and RMB stability, exchange rate fluctuations are influenced by a complex mix of fundamentals, liquidity conditions, trade and investment trends, and especially the increasingly complex geopolitical landscape. Excessive optimism in this context may hinder improvements in China's external circulation and inject more uncertainty into domestic demand.
Final analysis conclusion:
With markets having already priced in the Fed's rate cut, its actual implementation has had limited impact not only on dollar liquidity but also on the RMB. At this stage, overly optimistic expectations of rapid RMB appreciation may be premature and risk underestimating both internal and external uncertainties.
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Dr. Wei Hongxu is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.
