Investors should gradually adapt to asset allocation in an environment of sustained RMB appreciation, as factors driving the currency's rise continue to accumulate and market attention grows. Over the past two decades, seven RMB appreciation cycles have shown that exchange rates are not the decisive factor in sector allocation. However, certain industries do perform better in the early stages of sustained appreciation expectations, and markets may replicate this "muscle memory." Cost-income analysis reveals that about 19% of industries could see improved profit margins due to appreciation, making them increasingly attractive to investors. Additionally, policy responses aimed at curbing excessive unilateral appreciation trends may play a more significant role in sector allocation.

**Growing Factors Supporting RMB Appreciation** China's cumulative trade surplus for the first 11 months of this year reached $1.076 trillion, up 21.7% year-on-year, hitting a record high. More importantly, exporters' willingness to settle foreign exchange has risen significantly, with the surplus-to-settlement ratio exceeding 100% in October—a key difference from previous years. Since 2022, an estimated $1 trillion in unsettled export proceeds could reinforce RMB appreciation expectations once formed. Beyond long-term positioning, global speculative demand for tangible assets has also increased. For instance, declines in the Crypto Fear & Greed Index have consistently coincided with spikes in SPDR Gold ETF holdings, suggesting broader interest in hard assets. The tokenization of real-world assets, such as shipping containers, has outpaced virtual asset tokenization this year. As the currency of the world's largest manufacturing and commodity-consuming nation, the RMB's intrinsic value is poised for reassessment.

Short-term catalysts include weaker-than-expected U.S. November inflation data, which has bolstered expectations of Fed rate cuts in 2024, further supporting RMB appreciation. Offshore USD/CNY spot rates are nearing 7.0, while 1-, 2-, and 5-year forward rates have risen to 6.90, 6.79, and 6.44, respectively, with the 1-year forward rate climbing 313 pips since December.

**Historical Appreciation Cycles and Sector Performance** Past appreciation cycles (e.g., 2005–2008, 2010–2015) saw varied sector leadership, from non-bank financials and commodities to tech and consumer staples, indicating exchange rates alone don’t dictate allocations. Only the 2020–2021 cycle, driven by China’s supply-chain dominance, showed sustained outperformance in sectors like renewables and consumer services.

**Short-Term "Muscle Memory" Plays** Industries such as airlines (lower USD-denominated fuel and maintenance costs), paper (cheaper pulp imports), and utilities (imported energy) often see early-cycle rallies due to intuitive cost benefits, though long-term fundamentals remain demand-driven.

**Profit Margin Expansion Opportunities** Analysis of 211 sub-sectors using 2023 input-output tables identifies four groups likely to benefit from RMB appreciation: 1. **Upstream resources**: Steel, metals, petrochemicals, basic chemicals, and semiconductor materials. 2. **Domestic consumer goods**: Agriculture (feed, edible oils), light manufacturing (paper), and consumer electronics. 3. **Services**: Utilities (gas), transport (shipping), e-commerce (import-focused), and industrial services. 4. **Manufacturing equipment**: Machinery and semiconductor tools.

**Policy Responses as Key Allocation Drivers** To counter excessive appreciation, policymakers may: 1. Ease monetary policy to lower real rates, potentially boosting domestic demand sectors. 2. Relax capital controls, enabling offshore investments by financial institutions and households—a tailwind for brokers and insurers expanding globally.

**Three Allocation Themes Under RMB Appreciation** 1. **Muscle memory trades**: Airlines, paper, and utilities. 2. **Margin expansion plays**: Resource importers and domestic-focused industries. 3. **Policy beneficiaries**: Financials (from capital account liberalization) and rate-sensitive sectors like property.

**Risks**: Escalating U.S.-China tensions; weaker-than-expected policy support or economic recovery; liquidity tightening; geopolitical conflicts; prolonged property market adjustments.