The Renminbi Midpoint Hits a Three-Year High, Strengthens Prior to Xi-Trump Meeting

On the eve of the upcoming meeting between the leaders of the United States and China, the People's Bank of China has significantly increased the midpoint rate of the yuan against the US dollar. On Monday, the yuan midpoint rate was set at 6.8467, the highest level since March 2023, demonstrating the regulatory authorities' acceptance of the currency's appreciation in advance of a key diplomatic juncture.

Bolstered by the stronger midpoint rate, both the offshore and onshore yuan markets responded swiftly. The onshore yuan exchange rate against the US dollar once broke through the 6.8 mark, reaching a high of 6.795, setting a record high since last February.

Despite the new highs in the exchange rate, analysts have noted that the midpoint rate for the day was actually slightly weaker than market expectations. This indicates that while the People's Bank of China tolerates the strengthening of the yuan, it is also consciously curbing excessive speculation through pricing mechanisms, attempting to slow the pace of yuan appreciation.

Mitul Kotecha, Head of FX and Emerging Market Strategy at Barclays Bank, believes that China usually tends to maintain exchange rate stability or mild appreciation before significant diplomatic meetings. Although authorities are resisting the speed of appreciation, they feel relatively comfortable with the overall direction of the yuan's current operation.

Goldman Sachs pointed out in a recent report that the appreciation of the yuan is supported not only by diplomatic expectations but also by fundamentals. Goldman Sachs estimates that the yuan is currently undervalued by about 20%, and in the context of China's continuously strengthening global export competitiveness, a return to equilibrium levels is an inevitable trend.

Echoing the strong exchange rate is the release of China's deflation relief signal from its inflation data. Data released on Monday showed that China's CPI rose by 1.2% year-on-year in April, higher than market expectations. After turning positive in March, PPI continued to grow, with industrial prices such as oil and natural gas extraction rising significantly, influenced by fluctuations in global energy costs.

For investors, the current focus in the market is on whether the upcoming Xi-Trump meeting can reach substantial outcomes. If the meeting between the two leaders sends out a more-than-expected easing signal, the yuan may face further revaluation space.