In recent weeks, as the U.S. dollar index has retreated from its early-April highs, the Chinese RMB has appreciated accordingly. At first glance, the logic appears straightforward: when the dollar weakens, non-U.S. currencies tend to rebound, and the RMB naturally follows. Yet once the time horizon is extended, the underlying dynamics become far more complex, revealing a deeper structural story rather than a simple cyclical adjustment.
From February 28, when the geopolitical conflict involving the U.S., Israel, and Iran escalated, through April 11, when tensions began to ease, global financial markets experienced a classic risk-off episode. During this period, the dollar index rose by 1.08%, typically a condition that exerts broad pressure on non-dollar currencies.
This pattern was largely reflected in major currencies: the Japanese yen depreciated by 2.02%, the Korean won by 2.89%, the euro by 0.77%, and the British pound by 0.18%. Nearly all major developed-market currencies weakened against the dollar. In contrast, the Chinese RMB appreciated by 0.33%, moving from approximately 6.86 to 6.83 per U.S. dollar, making it one of the very few major currencies to register net appreciation during a period of dollar strength.
This divergence suggests that the RMB’s performance cannot be explained solely by dollar cycles; additional structural forces were clearly at work.
One important dimension lies in the asymmetric impact of energy price shocks on different economies. Rising oil prices are typically viewed as a headwind for manufacturing-oriented economies, particularly those dependent on energy imports. However, China’s position is more nuanced. On one hand, China has become a global leader in renewable energy industries, particularly electric vehicles and solar photovoltaics. Higher oil prices tend to accelerate substitution toward these sectors, strengthening medium-term demand expectations for Chinese industrial exports. On the other hand, compared with economies that remain heavily dependent on imported fossil fuels and are slower in energy transition, China’s manufacturing base benefits from a relative cost advantage in a high-energy-price environment.
This contrast is especially evident in Japan and South Korea. Both economies are highly export-oriented, yet their energy structures remain heavily import-dependent and relatively concentrated. As a result, rising energy costs combined with external demand uncertainty place greater pressure on their industrial competitiveness and currencies.
A second layer of explanation comes from shifting expectations around global supply chains. The Middle East is a critical hub for petrochemical intermediates, aluminum products, and various industrial inputs. Rising geopolitical instability in the region naturally raises concerns about supply chain reliability. While actual industrial relocation takes years to materialize, financial markets tend to price in expectations much earlier. In this context, China’s comprehensive manufacturing system and substitution capacity position it as a potential beneficiary of global supply chain diversification narratives.
The combination of these two forces, energy-driven relative competitiveness and supply chain resilience expectations, helps explain why the RMB remained stable or even slightly stronger during a period when the dollar was appreciating.
By contrast, Japan and South Korea face more structural vulnerabilities. According to Japan’s Ministry of Economy, Trade and Industry, over 95% of Japan’s crude oil imports come from the Middle East. South Korea’s overall energy import dependency has remained around 90% in recent years, according to the Korea Energy Economics Institute. In a scenario where geopolitical risks threaten key shipping routes such as the Strait of Hormuz, such concentrated dependency is quickly reflected in currency weakness.
China’s position differs materially in this regard. Its energy import structure has become increasingly diversified, with the Middle East’s share declining to below half, while Russia, Africa, and Latin America provide important supplementary sources. In addition, China maintains a substantial strategic petroleum reserve and commercial inventory buffer, estimated to cover several months of consumption under disruption scenarios. Combined with its integrated industrial system, this creates a meaningful buffer against external energy shocks.
From a longer-term perspective, this resilience is not the result of short-term policy responses, but rather the outcome of decades of industrial and energy system development. When global uncertainty rises, financial markets tend to reassess the resilience of different economies. Those with more diversified energy sources, deeper industrial systems, and stronger supply chain integration tend to receive a higher risk-adjusted valuation.
The RMB’s relative stability during this period reflects such a repricing of structural resilience rather than a simple reflection of monetary cycles or short-term capital flows.
At the institutional level, China’s exchange rate regime also plays a role. Since the 2005 reform, China has adopted a managed floating exchange rate system based on market supply and demand, with reference to a basket of currencies. This framework lies between a fully free-floating system and a fixed exchange rate regime. It allows market forces to determine pricing while retaining policy tools to smooth excessive volatility.
However, institutional design alone does not guarantee stability. Its effectiveness depends heavily on supporting conditions, particularly foreign exchange reserves. Historical experience, especially during the Asian Financial Crisis, demonstrated that economies with insufficient reserves were vulnerable to sharp currency collapses, even if they adopted managed exchange rate regimes. In contrast, countries that accumulated substantial reserves after that period significantly strengthened their external resilience.
China has since built one of the world’s largest foreign exchange reserve positions, exceeding $3 trillion at its peak. These reserves serve multiple functions: they provide direct intervention capacity in periods of market stress, enhance sovereign creditworthiness, and support investor confidence in RMB-denominated assets. This confidence channel is often as important as the direct liquidity function.
At the same time, it must be acknowledged that large-scale foreign exchange reserves also have macroeconomic side effects, including impacts on domestic liquidity through foreign exchange settlement mechanisms. This dual nature means reserves function both as a stabilizing tool and as a structural monetary variable requiring careful calibration.
Finally, external policy dynamics also matter. In the current global context, the United States does not necessarily favor significant RMB depreciation. If China’s currency were to weaken substantially, it would partially offset the impact of tariffs on Chinese exports, reducing the effectiveness of trade policy tools. As a result, exchange rate dynamics also become embedded within broader geopolitical and trade bargaining frameworks, indirectly contributing to RMB stability in certain periods.
Source: stcn, xinhua, people’s, 21jingji, cgtn
