Where do we stand with RMB internationalization? The role of capital flows, Hong Kong and yuan appreciation

From the $1 trillion trade surplus to renewed overseas investment, China's capital flows and the RMB have once again become the focus for global investors and policymakers. Beyond the much-discussed issue of capital controls, the interrelated factors in the evolution of export competitiveness, geopolitical competition, and RMB internationalization will be areas of change in the future, with economic implications for China and the world. In this report, we present our revamped China Capital Flow Tracker, starting from an overview of 2025 with the expectation for 2026. The report series will be published every quarter with key cyclical and structural messages and a detailed chartbook, striking a balance between timeliness and depth.Structural changes in net FX receiptsChina has seen renewed inflows in the net FX receipts and settlement, reversing the previous trend in depreciation pressure in 2025. The main support comes from the huge current account surplus. Net capital flows in capital and financial accounts were largely negative, and it has only reached a balance in January and February 2026Not until recently, despite the renewed net inflows in FX receipts, China did not manage to accumulate FX reserves. The RMB has appreciated versus the weaker USD and remained stable against the currency basket, reflecting the policy priority. And yet, China's deflationary pressure has led to a sharp real exchange rate depreciation, one of the reasons for China’s competitiveness.Such a vast trade surplus is structural and results from supply-side government policy, the pursuit of self-sufficiency, and deflationary pressures. Together with weakening domestic demand, such as in real estate, it is unlikely that China can suddenly step up its imports. Therefore, stronger competitiveness and lower demand for global goods will keep China's trade surplus in goods above $1 trillion and further increase in 2026. China is also running a narrower trade deficit due to mild outbound tourism rebounding. There is sign of domestic substitution beyond goods, as firms are not paying less for external services, yet tech-related receipts are growing rapidly.In the capital and financial accounts, China has stepped up its pace of overseas investment. Due to shrinking profit margins in domestic markets, Chinese firms have embarked on the journey to go global. Meanwhile, inward FDI has decreased due to geopolitical factors, lower nominal growth, and fiercer price competition. Regarding securities, China has allowed greater outbound investment, especially in Hong Kong equities, with pricing power increasingly high through the Stock Connects. There has also been a more diversified approach to bond investment, moving away from the US toward alternative markets such as Europe and Australia.Hong Kong as an integral part in analyzing RMB capital flowsWith more activities taking place offshore, it is important to analyze FX conversion data on capital flows from Hong Kong and Mainland China to build a complete picture of RMB transactions. Although Hong Kong's RMB pool of assets and liabilities is less than 1% of mainland China, it has a vital role in forex activities. As China's offshore RMB center, Hong Kong saw 73% more forex activity than mainland China in 2025, up from 62% in 2022. It carries an important role as the stabilizer and firewall of financial risks in the yuan related activities for mainland China.We find that Hong Kong's forex activities often counterbalance the "excessive appreciation or depreciation of RMB movements" with the most likely chance of local and cross-border interbank activities. Our augmented measure, combining the net FX conversion for Hong Kong and mainland China, shows net inflows from the RMB to the USD. Together with the weaker USDCNY fixing influenced by the counter cyclical factor direction, the net conversion towards the USD signals the official stance in reducing the yuan appreciation pressure.RMB internationalization progress has plateauedThe RMB internationalization plateaued in 2025, with falling use in international payments, investment and reserves due to cooling transactions in Hong Kong, foreign investors’ hesitance and rising geopolitical risks. RMB financing continued to grow thanks to lower funding costs. As outbound investment keeps rising, China’s international position has first turned from net debtor to net creditor and bolstered transaction of RMB derivatives for currency hedge. With sustained current account surplus and limited FX settlement, outflows from the financial account will continue.However, most outbound RMB got converted due to a lack of high-quality RMB assets. Since 2022, China has transferred 6.7 trillion yuan overseas, while offshore RMB deposits only increased by less than 100 billion. As expectations of RMB appreciation rise which attracts global investors, it is important for China to provide more RMB assets, which is already on the move as suggested in the rapid growth of Dim Sum bond market. Moving forward, we expect more issuance from both private and public entities with the support of onshore Chinese banks.What to expect in 2026?China has continued financial opening but with “managed currency, managed capital flows and managed RMB internationalization”. In 2026, we expect the divergence between China's current account and capital and financial account to continue. As long as China continues to run a trade surplus, it will allow more moderate net capital outflows through direct and securities investment. Whether the yuan will appreciate further will hinge on exporters' decisions to convert more FX receipts into yuan, which is a potential upside on the currency provided the dollar weakens further.On the RMB internationalization, it is always a trade-off between more inflows but with the risks in more volatility. China will likely take a step-by-step approach with caution. As such, Hong Kong appears to be the best magnet to attract global interest and the acceptable firewall to insulate the risks. Still, the RMB internationalization progress will be slow and it will remain capped by the low yield and scarcity of RMB assets beyond capital control.