Offshore RMB receives additional policy support, and lower reserves signal a narrowing trade surplus

Overview

This report focuses on China’s RMB exchange rate, foreign exchange reserves, cross-border capital flows, and offshore RMB market policy. It notes that China’s June foreign exchange reserves declined and were below expectations. Combined with alternative data tracking, this may point to stronger-than-expected imports, a narrowing trade surplus, and a slight widening of implied capital outflows. At the same time, PBoC and related regulators have introduced or emphasized a series of offshore RMB liquidity and cross-border financial market access tools, and the report believes these measures support CNH market functioning and RMB internationalization.

Core views

The core view of the report is that recent policy signals do not amount to a full suppression of capital outflows, but rather tighter execution and channel cleanup within a governance framework for cross-border fund, technology, data, and talent flows. Offshore official-sector RMB reverse-repo tools, increased southbound bond Connect quotas, expanded HKMA RMB liquidity arrangements, and optimizations to QDII quotas and ODI FX management all suggest that policy still seeks to expand compliant channels and support RMB internationalization. For CNY in 2H 2026, the trade surplus remains a structural external balance anchor, while USD moves, exporters’ settlement behavior, trade-policy friction, domestic policy expectations, and regulatory uncertainty will jointly affect the pace of appreciation.

Analysis framework

The report uses changes in foreign reserves, valuation effects, current-account estimation, implied capital flows, gold purchases, and US Treasury holdings, combined with policy announcements and market micro-liquidity factors, to analyze the short- and medium-term drivers of CNY and CNH.

Methodology notes

• Balance of payments analysisForeign reserve decomposition and implied capital flow estimation

  Infer trade surplus and capital flow pressure from reserve changes, valuation gains/losses, and current-account estimates.

  The report links the June reserve shortfall to stronger imports and a narrowing trade surplus and estimates the current-account surplus, valuation losses, and implied capital outflows.

• Policy signal analysisCross-border capital governance and RMB internationalization framework

  Distinguish between governance implementation, channel cleanup, and broad capital-control tightening.

  The report believes the measures from May to June are more focused on governance improvements, while supporting compliant cross-border channels through quotas, tools, and infrastructure.

• Exchange-rate driver analysisCNY catalysts framework for 2H 2026

  Evaluate RMB direction across five dimensions: trade, settlement, the USD, policy meetings, and regulatory signals.

  The report stresses that CNY appreciation potential depends not only on fundamentals, but also on PBoC’s tolerance for the pace of appreciation and shifts in market sentiment.

Asset mapping & comparison

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

• CNY

  Core research subject

  Strengths

  The trade surplus remains structural support in the international balance sheet, and improved exporter settlement and policy confidence may offer episodic support.

  Weaknesses

  Stronger imports, a narrowing trade surplus, stronger USD, and China-US policy divergence could suppress the pace of appreciation.

  Comparison

  CNY appreciated 3% vs USD in 1H 2026, but further upside will depend more on PBoC’s tolerance for appreciation pace.

  Risks

  Trade friction, USD rebound, a more hawkish Fed, below-expectation domestic policy, and regulatory uncertainty.

• CNH

  Asset benefiting from offshore RMB liquidity and sentiment

  Strengths

  Official-sector offshore RMB reverse-repo tools, expanded HKMA liquidity arrangements, and optimized southbound Bond Connect mechanics help improve offshore market functioning.

  Weaknesses

  Uncertainty from regulatory implementation may still affect market access and sentiment.

  Comparison

  Compared with onshore CNY, CNH is more directly affected by offshore liquidity, access channels, and international investor sentiment.

  Risks

  If subsequent implementing rules are interpreted as stricter, or compliant-channel expansion proves insufficient, CNH sentiment may come under pressure.

• Gold reserves

  Central bank reserve allocation watch item

  Strengths

  PBoC’s faster gold accumulation in June indicates continued diversification of reserve asset allocation.

  Weaknesses

  Gold buying itself does not directly determine the RMB spot exchange rate.

  Comparison

  Additions in 1H 2026 were 1.29 mn oz, above 0.25 mn oz in 2H 2025.

  Risks

  Gold price volatility and reserve valuation changes can affect the accounting profile of reserves.

• US Treasuries

  China official reserve allocation watch item

  Strengths

  Still a key component of reserve assets.

  Weaknesses

  A slight April decrease may reflect reserve allocation shifts.

  Comparison

  Chinese US Treasury holdings fell to US$651.1bn in April.

  Risks

  Treasury yields and changes in the USD index can affect valuation and reserve management.

Key data

• June foreign exchange reservesUS$3416.3bnDown US$26bn from the prior month, below J.P. Morgan’s estimate of US$3439bn and the consensus estimate of US$3436bn.
• Estimated current account surplusUS$52.4bnThe report uses this to judge that the trade surplus may be narrowing.
• Estimated valuation lossUS$33.5bnThe dollar index rose from 98.9 to 101.2, creating valuation drag.
• Implied capital outflowUS$45bnThe report views capital outflows as having possibly expanded slightly.
• PBoC June gold purchase+0.48 mn ozCumulative additions in 1H 2026 were 1.29 mn oz, above 0.25 mn oz in 2H 2025.
• China April US Treasuries holdingsUS$651.1bnDown US$1.2bn from the prior period.
• Annual southbound Bond Connect quotaRMB 500bn lifted to RMB 800bnSouthbound bonds were also added as eligible repo collateral.
• HKMA RMB liquidity arrangementRMB 200bn raised to RMB 500bnMaturity was extended to up to three years, alongside offshore central bank reverse-repo tools in Hong Kong.
• RMB performance in 1H 2026CNY rose 3% vs USD, CFETS basket rose 4.9%The report says actual constraints come more from PBoC’s tolerance for appreciation speed.

Impact & implications

For investors, the report suggests that the CNH and CNY policy environment is not simply tightening, but a rebalancing between capacity expansion of compliant channels and clearer regulatory boundaries. Offshore RMB liquidity tools help improve market functioning and liquidity management for offshore official institutions, but the reserve decline, narrowing trade surplus, stronger USD, and a more hawkish Fed risk could constrain further RMB appreciation.

Risks

• Renewed uncertainty from U.S. Section 301/232 tariffs.
• Escalating trade friction with the EU, including discussions around a “currency accord.”
• A stronger USD or a more hawkish Fed stance, limiting CNY appreciation.
• A tone at the July Politburo meeting below market expectations, which could hurt risk assets and RMB sentiment.
• If market interpretation of regulatory implementation details becomes stricter on capital outflows, CNH sentiment and channel access could be hit.
• If exporters do not expand USD settlement beyond newly accrued trade receivables, trade surplus support for RMB may be weaker than headline numbers suggest.

What to watch

• Whether next week’s trade data confirm stronger imports and a narrowing trade surplus.
• Whether exporter settlement shifts from new trade flow inflows to a drawdown of existing USD holdings.
• The impact of oil prices and the energy import bill on the trade surplus.
• Changes in the USD index and Fed policy language.
• The July Politburo meeting’s tone on fiscal resource deployment and incremental stimulus.
• Subsequent cross-border capital regulatory implementation details, and whether additional quotas or compliant pathways further expand outward investment channels.
• Actual usage of offshore central bank reverse-repo tools, southbound Bond Connect, and HKMA RMB liquidity arrangements.