A stronger trend of the renminbi has highlighted its hedging function. However, this does not mean that the RMB will be on a one-way appreciation trajectory. Risk aversion might be driving the RMB's appreciation, but the underlying reasons are the good performance of China's economy, policies and market.

China was the first economy to resume production and register positive economic growth amid the COVID-19 pandemic, increasing the attractiveness of RMB-denominated assets. China is adhering to a normal monetary policy, keeping the growth of money supply and social financing basically in line with its nominal economic growth, the macro leverage ratio basically stable, and prices within a controllable range. It has also continuously improved the two-way opening channels of its financial market, and enhanced the autonomy and stability of its financial system, ensuring the orderly flow of cross-border funds and increased foreign investor confidence in RMB assets.

However, despite the RMB's enhanced hedging function its exchange rate faces many uncertainties. China's export volume will gradually decline. If the Fed starts to raise interest rates, the risk-free interest rate gap between China and the US may narrow, and some interest-sensitive funds may flow out of China. Once the geopolitical tension eases in the future, this may increase depreciation pressures on the RMB exchange rate to a certain extent.

The RMB is likely to become an attractive and trustworthy hedge currency, and gain an international status commensurate with the size and strength of the Chinese economy. However, for that to happen, China should adopt macroeconomic policies based on its domestic economic situation and price trend, strengthen its decision-making autonomy and maintain domestic stability. It should deepen market-oriented reform of the RMB exchange rate, improve macro-prudential management of cross-border finance, guide market players to adhere to the concept of "risk neutrality", and keep the RMB exchange rate basically stable. It should also continue to deepen two-way opening-up of the financial sector, further enhance the attractiveness of RMB assets in China, and strengthen financial security.