China's external balance and CNY valuation Report Interpretation

Overview

This macro note links China’s stronger-than-expected August FX reserves to export resilience, a still-elevated current-account surplus and continued underlying CNY appreciation pressure. JPMorgan argues that the PBOC is likely to manage the pace of appreciation rather than reverse its direction.

Core views

China’s August FX reserves rose US$19.5bn to US$3,438.3bn, exceeding market consensus of US$3,427bn. JPMorgan interprets the upside surprise as pointing to stronger-than-expected export performance and potentially softer imports, implying a wider trade surplus. The institution expects the current-account surplus to remain elevated at around US$89bn. After allowing for an estimated US$6.9bn valuation gain from a weaker USD, it estimates implied capital outflows narrowed modestly to US$76.4bn from US$106.8bn in July. The report also highlights a continued reshaping of reserve assets. The PBOC added 0.65mn ounces of gold in August, an accelerated pace relative to the 0.25mn ounces added in total during 2H25, although below the 1.29mn ounces added over 1H26. Meanwhile, China’s US Treasury holdings fell US$25.9bn to US$633.4bn in June, the latest available reading. These developments are presented alongside the broader reserve and external-balance picture rather than as a separate forecast. JPMorgan’s Global FX Strategy team has become more constructive on the USD, arguing that the currency remains 3–4% undervalued relative to rate differentials despite stronger US yields, hawkish signals from Fed Chair Warsh, and resilient US payroll data. Persistent US yield superiority, attractive carry and the dollar’s valuation discount are expected to limit dollar downside. The report notes that synchronized global rate hikes and the extent to which Fed tightening is already priced may constrain the scope for a major USD rally, but views these factors as insufficient to support a sustained dollar-bear trend. For China, a firmer USD could cap near-term CNY appreciation against the dollar and reduce pressure on the PBOC, which JPMorgan says has signaled discomfort with rapid RMB gains through weaker-than-expected daily fixings. This could give policymakers more room to permit market-driven RMB appreciation, including ahead of President Xi’s scheduled US visit. If CNY appreciation pressure against the USD eases in a firmer-dollar environment, the PBOC may have greater flexibility to guide a stronger RMB on a trade-weighted basis, which the report says could help address external concerns about trade imbalances. The note places this currency outlook within intensifying international scrutiny of China’s external surplus. At the G20 finance ministers and central bank governors meeting, disagreement over global imbalances, non-market policies, sovereign debt and energy supply chains prevented a joint communiqué. The US position emphasized persistent current-account surpluses, export reliance and non-market practices, while China rejected the characterization and stressed domestic-demand support and a multilateral approach. JPMorgan challenges the framing of CNY valuation as a binary choice between deliberate currency undervaluation and a by-product of domestic saving-investment imbalances. Although both sides of the debate may view the CNY as 20–30% undervalued, the report considers that debate unhelpful: such a large undervaluation should, in its view, be associated with inflation in China and disinflation abroad. Instead, China has faced deflation while much of the world has experienced elevated inflation. It therefore argues that currency valuation should be assessed through economy-wide general-equilibrium frameworks rather than trade or current-account measures alone. Looking ahead, the report expects domestic policy to emphasize stronger fiscal execution but does not expect this alone to materially reduce export reliance as the main engine of demand growth. Without substantial household fiscal transfers or reforms that reduce precautionary saving, excess saving and external surpluses are expected to remain high, sustaining export-revenue conversion and underlying CNY appreciation pressure. At the same time, unfavorable rate differentials continue to support demand for overseas assets, contributing to tighter regulation of outbound investment and offshore wealth management alongside the gradual expansion of official outflow channels under RMB internationalization.

Analysis framework

JPMorgan starts with the August reserve surprise, separating the effects of trade flows, valuation changes and implied capital outflows. It then connects reserve composition, US rate and USD dynamics, PBOC exchange-rate management, global-imbalance debates and China’s domestic saving-demand structure to form its CNY outlook.

Methodology notes

• Other

  Economy-wide general-equilibrium assessment of currency valuation

  The report argues that CNY valuation should not be judged from trade or current-account balances alone; it instead tests large undervaluation claims against broader inflation and price dynamics across China and its trading partners.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• CNY/RMB

  The report expects underlying appreciation pressure from elevated current-account surpluses, moderated in the near term by a firmer USD and PBOC smoothing.

  Strengths

  Persistent export revenues, elevated external surpluses and potential trade-weighted appreciation support.

  Weaknesses

  Unfavorable rate differentials continue to encourage overseas-asset demand.

  Comparison

  A firmer USD may cap CNY appreciation against the dollar while allowing a stronger RMB in basket terms.

  Risks

  Rapid RMB gains may prompt PBOC smoothing through exchange-rate management.

• USD

  A tactically stronger USD is a key external condition shaping China’s near-term currency path.

  Strengths

  US yield superiority, attractive carry and an estimated 3–4% valuation discount.

  Weaknesses

  Much of Fed tightening is already priced in, while synchronized global rate hikes may limit a major rally.

  Comparison

  The dollar has lagged the increase in US yields despite the report’s view that it remains undervalued relative to rate differentials.

  Risks

  The report does not expect the cited supportive factors to necessarily produce a major USD rally.

Key data

• China FX reservesUS$3,438.3bnRose US$19.5bn in August versus market consensus of US$3,427bn.
• Expected current-account surplusAround US$89bnJPMorgan expects the surplus to remain elevated.
• Implied capital outflowsUS$76.4bnPreliminary estimate, down from US$106.8bn in July after accounting for a US$6.9bn USD-related valuation gain.
• PBOC gold purchases0.65mn ozAdded in August, compared with 1.29mn oz in total in 1H26 and 0.25mn oz in total in 2H25.
• China US Treasury holdingsUS$633.4bnFell US$25.9bn in June, the latest available data.
• USD valuation versus rate differentials3–4% undervaluedJPMorgan Global FX Strategy’s estimate supporting its tactically bullish USD stance.
• CNY undervaluation claims in the debate20–30%The report says both camps may agree on this range but argues that the framing is not useful.

Impact & implications

The report sees resilient exports and persistent external surpluses as maintaining underlying CNY appreciation pressure. A stronger USD may limit immediate CNY gains against the dollar, but could give the PBOC more latitude to guide a firmer trade-weighted RMB while smoothing the pace of appreciation.

Risks

• Unfavorable rate differentials may continue to drive Chinese demand for overseas assets and capital outflow pressure.
• Global trade and external-imbalance disputes remain part of US-China bilateral discussions.

What to watch

• Whether August reserve strength is confirmed by export and trade-surplus data.
• The pace of PBOC FX fixings and its approach to smoothing RMB appreciation.
• President Xi’s scheduled US visit and US-China AI talks expected in mid-September.
• Progress on fiscal execution, household transfers or reforms that could reduce precautionary savings.