Adjustment of China's Investment Strategy Amid Narrowing China-US Interest Rate Spread in 2026

1. Interest Rate and Capital Flow Background
   : In 2025, the Federal Reserve started the interest rate cut channel, and the federal funds rate dropped to 3.50%-3.75%; China’s 1-year LPR remained at 3.00%, and the inverted interest rate spread pattern continued. China faced large-scale capital outflows in the first quarter of 2025, with foreign exchange reserves decreasing by 31.0 billion USD [0].
2. Exchange Rate Trend and Forecast
   : In 2025, USD/CNY fluctuated between 7.00-7.50, hitting a low of 7.0414 on December 19 [0]. In 2026, as the China-US interest rate spread narrows, market consensus supports RMB appreciation—Goldman Sachs expects USD/CNY to reach 7.0 by mid-year [1], and Bank of America predicts it will operate in the range of 6.90-7.30 [2].
3. Economic and Policy Outlook
   : China’s GDP growth is expected to stabilize at 4.7%-5% in 2026, and policies will focus on supporting consumption and advanced manufacturing [0]. The central bank may cut interest rates by 10-20 basis points, but the Federal Reserve’s rate cut pace is more aggressive, and the trend of narrowing interest rate spreads is clear.

• The narrowing China-US interest rate spread will ease capital outflow pressure, enhance the attractiveness of RMB assets, and bring investment opportunities to domestic demand-driven consumption and advanced manufacturing sectors [0].
• The combination of the central bank’s “moderate easing” and the Federal Reserve’s aggressive rate cuts may gradually break the inverted interest rate spread deadlock in 2026, and the stability of the RMB exchange rate will increase [0].
• The certainty of policy support (consumption, advanced manufacturing) and the expectation of stable exchange rates will be the core support for investment strategies in 2026.

• Opportunities
  : Consumption and advanced manufacturing are supported by policies; RMB appreciation is beneficial to import-oriented enterprises; the bond market may present an allocation opportunity due to narrowing interest rate spreads [0].
• Risks
  : Uncertainty in the Federal Reserve’s interest rate cut pace (such as larger-than-expected rate cuts or a pause) may affect the process of narrowing interest rate spreads; the stability of domestic economic recovery needs continuous observation [0].

Investment in 2026 needs to focus on: ① The impact of narrowing China-US interest rate spreads on capital flows and exchange rates; ② The intensity of policy support for consumption and advanced manufacturing; ③ The coordination between the Federal Reserve’s interest rate cut pace and the central bank’s policies. Strategies should balance RMB asset allocation and policy-oriented industries while maintaining vigilance against market fluctuations.