CNY FX remains a relative safe haven, while rates enter a range-bound phase

Overview

This report is JPMorgan's mid-2026 outlook for China's local markets, with core coverage on CNY FX and CNY rates. It argues that, amid simultaneous global market volatility, shifts in the US dollar backdrop, and weak domestic demand in China, renminbi assets displayed relative safe-haven characteristics in 1H26. Entering 2H26, the renminbi appreciation trend is still expected to continue, though the pace may slow; China government bond yields, meanwhile, are expected to remain broadly range-bound under the combined influence of liquidity, allocation demand, and supply pressure.

Core views

The report's core views include: first, it remains bullish on CNY FX, with a 4Q26 USD/CNY target of 6.70, and recommends shorting USD/CNH via options. Second, renminbi strength does not rely entirely on rate differentials and the domestic cycle; more important are the trade surplus, corporate FX conversion into RMB, improvement in the services deficit, foreign equity inflows, and the PBoC's managed exchange-rate policy. Third, CNY rates remain neutral, with a 4Q26 10-year China government bond yield target of 1.80%; although current valuations are slightly rich, weak domestic demand and strong allocation demand limit upside in yields. Fourth, the PBoC is unlikely to actively engineer a sharp reversal in either FX or rates in the near term, but will continue to control the pace of appreciation and liquidity.

Analysis framework

The report assesses the risk-reward of the renminbi and Chinese bonds by combining FX fundamentals, the balance of payments, corporate FX settlement and sales, policy signals, valuation models, the yield curve, liquidity conditions, and fund flows. The FX section focuses on comparing the renminbi with rate differentials, the domestic cycle, the trade surplus, corporate USD holdings, and the PBoC's fixing policy; the rates section focuses on loose liquidity, the gap between deposit and loan growth, wealth-management and bond-fund flows, government bond supply, and the PBoC's operating framework.

Methodology notes

• FX FundamentalsBalance of Payments Framework

  Assess renminbi support through the trade surplus, services deficit, corporate FX conversion into RMB, and foreign portfolio inflows.

  The report argues that the key to renminbi strength is not just rate differentials, but that China's trade income being converted into RMB, a narrowing services deficit, and renewed foreign inflows into Chinese assets have jointly improved FX supply and demand.

• Policy AnalysisPBoC Managed Exchange-Rate Framework

  Infer exchange-rate policy bias through the fixing, deviations between spot and fixing, policy meetings, and diplomatic windows.

  The report believes the PBoC allows the renminbi to appreciate gradually, but controls the speed through smoothing mechanisms to encourage corporates to reduce USD exposure while avoiding excessive speculative inflows.

• Rates Valuation10-Year China Government Bond Fair Value Model

  Compare the 10-year China government bond yield with estimated fair value to judge whether valuation is too rich.

  The report estimates fair value for the 10-year China government bond at about 1.85%, with the current yield around 10bp lower, indicating slightly rich valuation but not enough to trigger a clear trend reversal.

• Liquidity AnalysisLiquidity Conditions Index

  Assess the bond-demand environment through funding conditions, PBoC injections or withdrawals, and deviations between money-market rates and policy rates.

  The report argues that loose liquidity in 1H26 drove the duration rally, and even if bond supply rises later, the PBoC may still provide necessary liquidity to stabilize funding rates.

Asset mapping & comparison

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

• CNY FX

  Core bullish asset

  Strengths

  Strong trade surplus, rising corporate FX conversion into RMB, narrowing services deficit, improving foreign inflows, and still-supportive PBoC policy.

  Weaknesses

  The China-US rate differential remains wide, domestic demand is weak, and renminbi valuation is relatively strong versus cyclical fundamentals.

  Comparison

  Compared with 2021, the external rate-differential environment behind this round of renminbi strength is weaker, relying more on policy management and balance-of-payments support.

  Risks

  If the US dollar strengthens sharply again, the PBoC's policy tolerance declines, or a hit to domestic confidence triggers capital outflows, the renminbi appreciation trend could be disrupted.

• Short USD/CNH options direction

  Recommended FX expression

  Strengths

  Using options to participate in renminbi appreciation can help manage risk when the directional view is clear but the policy pace is controlled.

  Weaknesses

  If the dollar index strengthens or USD/CNH moves sideways, option time value may decay.

  Comparison

  The report mentions rotating into higher CNH crosses if DXY strengthens further, to seek CNY TWI appreciation potential.

  Risks

  Volatility, time to expiry, and changes in the policy fixing will affect strategy returns.

• CNY rates

  Neutral allocation asset

  Strengths

  Strong domestic allocation demand, weak credit demand, and deposit growth exceeding loan growth support duration demand.

  Weaknesses

  The 10-year China government bond yield is slightly below estimated fair value, and bond supply may rise in the second half of the year.

  Comparison

  Chinese bonds outperformed rates in major developed markets and regional Asian peers in 1H26, but lagged some higher-yielding emerging-market rates.

  Risks

  If domestic demand continues to recover, fiscal issuance pressure exceeds expectations, or the PBoC drains liquidity more aggressively, yields may rise.

• 10-year China government bond

  Anchor of the rates outlook

  Strengths

  Low correlation and safe-haven characteristics enhance its diversification value, while funding conditions still have stabilizing support from the PBoC.

  Weaknesses

  The current yield is about below the fair value of 1.85%, so valuation is not cheap.

  Comparison

  The 1.80% target yield implies the report expects it to remain mainly range-bound rather than trend lower.

  Risks

  Seasonally higher supply, marginal liquidity tightening, or a rebound in risk assets could weaken bond demand.

Key data

• 4Q26 USD/CNY target6.70The report maintains its view that the renminbi will continue to appreciate.
• 4Q26 10-year China government bond yield target1.80%Consistent with the neutral view on CNY rates.
• 1H26 USD/CNH changedown 2.4%The renminbi strengthened further against the US dollar, and the move was smoother than expected.
• 1H26 CNY TWI changeup 4.5%The renminbi trade-weighted index outperformed Asian and major G10 currencies.
• China government bond year-to-date returnabout 5%Performance stood out in a low-yield market, driven by both FX and bond returns.
• Net USD sales by Chinese corporatesabout USD 543 billionSince 2Q25, corporates have shifted from net USD buyers to net sellers.
• Estimated excess corporate USD savingsabout USD 550 billion to USD 915 billionIf part of this is converted into RMB, it could continue to create appreciation pressure on the renminbi.
• Contribution from services deficit improvementabout USD 50 billion to USD 60 billion per yearThe rebound in inbound tourism and visa facilitation have helped narrow the services deficit.
• CFETS TWI levelup more than 8% year over year, about 4.5% above trendAlthough it has already strengthened, it remains below historical extreme overvaluation ranges.
• Easing implied by the forward curveabout 5bpThe report considers market pricing for additional PBoC easing to be fairly reasonable.

Impact & implications

For investors, the report leans toward continuing to view CNY FX as the more directional opportunity within China's local markets, especially expressing a bearish USD/CNH view through options; on the rates side, however, current yields already look slightly rich, and the risk-reward of adding duration is less attractive than in 1H26, making it more appropriate to stay neutral and wait for clearer domestic demand or policy signals. Continued moderate renminbi appreciation could also enhance the portfolio appeal of Chinese equities and bonds to foreign investors.

Risks

• A further rise in the dollar index in 2H26 would reduce room for renminbi appreciation against the US dollar.
• The PBoC may be less tolerant of renminbi appreciation than expected and could limit gains through policy signals or fixing management.
• If persistently weak domestic demand evolves into a confidence shock, it could trigger capital outflows and alter renminbi supply and demand.
• The release of corporate USD savings may fall short of expectations, weakening support from FX conversion into RMB.
• An increase in government bond supply in the second half or seasonal liquidity tightening could push up China government bond yields.
• If domestic investment and consumption recover meaningfully, demand for bond duration may decline and create upward pressure on yields.

What to watch

• The PBoC daily fixing, deviations between spot and fixing, and signs of smoothing by agent banks.
• China-US rate differentials, DXY trends, and the level of the renminbi trade-weighted index.
• Corporate FX settlement and sales data, the trade surplus, and the pace of release in corporate USD deposits.
• Inbound tourism, the services trade deficit, and foreign inflows into equities and bonds.
• PBoC open market operations, overnight repo rates, and the functioning of the new rate corridor.
• The pace of net government bond issuance, the gap between deposit and loan growth, and flows into wealth-management products and bond funds.
• Domestic demand, property destocking, lagged effects of fiscal spending, and changes in foreign allocation to AI-related assets.