The exchange rate determines which ruler you use to measure returns, while asset quality determines whether there is anything underneath the ruler.

Written by: Daii

Let’s start with the conclusion.

If you hold US dollar deposits or stablecoins, the continuous appreciation of the renminbi will directly erode your renminbi returns. This is arithmetic, not opinion.

If you hold Bitcoin, Ethereum, or US tech stocks, the situation is completely different. They are quoted in US dollars, but that does not mean they are US dollar assets.

Mixing these two types of assets in discussion is the biggest pitfall of this issue.

As for "5.5 by the end of 2031," let’s put it back in the right context: this is a forecast with preconditions, not a promissory note that must be cashed out five years later. Anyone pressuring you to liquidate US dollars or bet everything on renminbi assets based solely on a final number is not engaging in asset allocation.

They are taking your money to finance their narrative.

1. First, let’s do the math: how much of your return will be eroded by the appreciation of the renminbi?

Assume that today you convert renminbi into US dollars to buy a certain US dollar asset. Then, five years later, you convert it back to renminbi.

Your total renminbi return is not just the return on the dollar asset, nor the changes in the exchange rate, but:

Renminbi return = (1 + US dollar asset return) × (end exchange rate ÷ start exchange rate) - 1

Here, the exchange rate is defined as "1 US dollar equals how many renminbi." When the renminbi appreciates, this number decreases.

If the renminbi appreciates by 3% annually, the cumulative appreciation over five years is about 14.1%. A US dollar asset needs to appreciate by about 16.4% cumulatively to offset the exchange loss when converting back to renminbi. The corresponding annualized hurdle rate for the US dollar is about 3.1%.

If the renminbi appreciates by 5% annually, the cumulative appreciation over five years is about 22.6%. The US dollar asset needs to appreciate by about 29.2% cumulatively to balance the exchange rate loss. The corresponding annualized hurdle rate is about 5.3%.

So, if you have a US dollar deposit with an annual return of 4% and the renminbi appreciates by 5% in the same year, ignoring taxes and exchange costs, your renminbi return would be approximately -1.2%. The amount of dollars in your account increased, yet your purchasing power in renminbi decreased.

This is why "high US dollar interest rates" cannot automatically lead to "holding US dollars being worthwhile." Interest is income. Exchange rates are the revaluation of principal. Both must be calculated on the same table.

But the reverse is also true.

If the renminbi does not appreciate as predicted, or depreciates midway, those who liquidate their US dollar exposure early will also bear opportunity costs. Exchange rate predictions are not one-way benefits. They merely swap one risk for another.

Classic studies have already revealed the awkwardness of exchange rate forecasting: many structural models struggle to consistently beat even a simple random walk benchmark in out-of-sample predictions. Today's models are certainly more complex than they were forty years ago. However, the variables influencing exchange rates have not decreased either. Growth differentials, interest differentials, inflation, capital flows, trade conditions, risk tolerance, and policy responses can all alter pathways.

Thus, 5.5 can be used for stress testing, but it cannot be used as a trading instruction.

2. The most common mistake in the cryptocurrency circle: treating dollar quotes as dollar risks

A Bitcoin priced at $100,000 does not mean you own $100,000.

The US dollar is merely a quoting tool. Bitcoin is the risk factor you actually hold.

The Bitcoin white paper defines it as a peer-to-peer electronic cash system. The protocol does not promise that one Bitcoin will exchange for a fixed number of US dollars. It will not automatically fall by 5% just because the renminbi appreciates by 5%. What truly drives Bitcoin prices are global liquidity, leverage, risk preference, regulatory changes, market structure, and supply and demand for crypto assets themselves.

Therefore, for renminbi investors, Bitcoin returns have at least two layers:

Renminbi-denominated BTC return = BTC's US dollar return × the compounded effect of changes in the US dollar to renminbi exchange rate

Assume BTC rises 30% in US dollars, while at the same time, the renminbi appreciates by 5%. The renminbi-denominated return would still be about 23.5%. At this point, the exchange rate is a drag, but not the main character.

Assume BTC drops by 50%, while the renminbi appreciates by 5%. The renminbi-denominated loss would be about 52.5%. At this time, agonizing over whether the renminbi appreciated by 3% or by 5% is akin to debating which raindrop is larger in a storm.

After simulating user data from major crypto platforms, the Bank for International Settlements found that as Bitcoin prices fell, a significant number of retail investors incurred losses. This conclusion at least reminds us: for high-volatility crypto assets, entry prices, positions, and cycle positions are often far more fatal than single-digit changes in exchange rates.

This does not mean that cryptocurrency investors can ignore the renminbi.

If your salary, rent, mortgage, taxes, and future consumption are all settled in renminbi, then the renminbi is your liability currency. Even if BTC appreciates, you will ultimately need to convert part of your assets back into renminbi for living expenses.

The key to watch is not which symbol your trading software defaults to show.

But rather what currency you will use to spend in the future.

3. Stablecoins are the purest US dollar exposure in this equation

USDT, USDC, and similar US dollar stablecoins are not the same as BTC.

Their goal is to maintain a price close to 1 US dollar. Therefore, as long as the peg is effective, holding stablecoins is akin to actively retaining US dollar exchange rate exposure. When the renminbi appreciates, even if the coin price stays steady at 1 US dollar, the value calculated in renminbi will still decline.

Moreover, stablecoins themselves usually do not automatically pay interest to on-chain holders simply because the issuer's reserves earn interest.

Taking USDC as an example, the issuer discloses that its reserves are primarily supported by highly liquid US dollar assets and provides reserve information. The income generated from the reserves does not mean that every ordinary holder has a direct claim on this income. What you receive are tokens and corresponding rights under redemption arrangements, not shares of the reserve asset portfolio.

Thus, a Chinese investor holding stablecoins unhedged for a long term may face five layers of risks:

• Decline in the US dollar to renminbi exchange rate;
• Issuer or reserve asset risk;
• Custodian bank and redemption channel risk;
• Exchange, wallet, cross-chain bridge, or private key risk;
• Decoupling and liquidity discount in extreme market conditions.

This is why the Financial Stability Board specifically proposed regulatory recommendations for global stablecoin arrangements. Stablecoins are not as simple as electronic US dollars on a screen. They involve governance, reserve management, redemption rights, stabilization mechanisms, cross-border regulation, and operational resilience.

A common counterargument in the cryptocurrency circle is: "I put stablecoins into DeFi, with an annual return of 8%, which is enough to cover the appreciation of the renminbi."

This statement holds true only under one condition: that 8% can genuinely materialize continuously at the same risk.

The reality is that DeFi returns may stem from borrowing demand, market-making fees, token subsidies, mismatched durations, or leverage. Each source has different collapse mechanisms. Subtracting a 5% exchange loss from an 8% protocol return and declaring a net gain of 3% is equivalent to pretending that risks related to smart contracts, liquidation, decoupling, platforms, cross-chain bridges, and liquidity are all free.

High returns are not an exchange rate hedge.

High returns are merely another risk bill.

4. Whether to keep US dollar assets does not depend on whether you believe in Goldman Sachs

A reliable decision-making framework only asks three questions.

First, do you have clear US dollar liabilities?

If you need to pay overseas tuition, dollar premiums, overseas living expenses in the coming years, or require dollars for business settlement, then retaining corresponding US dollar assets is very reasonable. It is not a directional speculation. It is about matching liabilities.

If you are certain about having to pay $50,000 in tuition two years from now, but you sell all your US dollars now due to a bullish outlook on the renminbi, you are essentially gambling your tuition against the exchange rate two years later. Winning the bet might be called cost savings. But if you lose the bet, you still have to pay on time.

Second, what type of "US dollar asset" are you holding?

US dollar demand deposits, term deposits, short-term government bonds, long-term government bonds, US stocks, dollar bond funds, stablecoins, and US dollar-denominated BTC are not all on the same dimension of risk. The former categories mainly consider interest rates, durations, credit, and exchange rates. Stablecoins additionally layer risks related to issuing, redeeming, custody, and on-chain. BTC primarily deals with the price risk of crypto assets.

"All US dollar denominated" is not an asset category.

It is like saying that gold and cabbage are the same asset just because they both weigh the same in kilograms.

Third, can you bear the consequences of a completely wrong prediction?

Assume the renminbi appreciates by 5% annually. Now assume it remains basically unchanged. Finally, assume the renminbi depreciates in phases. Insert your portfolio into these three scenarios.

If any of these scenarios would force you to liquidate, put you in a position where you cannot cover your expenses, or affect your basic living conditions, then the issue lies not in the accuracy of the prediction.

The issue is that your position has exceeded your capacity to bear.

5. For holders in the cryptocurrency circle, my answer is very direct

Your living expenses in renminbi for the next one to two years should not be placed in BTC, ETH, stablecoin investments, or centralized exchanges. They should exist as low-risk assets in renminbi. Living expenses are not principal waiting to double. They are insurance that prevents you from having to sell at a loss during a market crash.

Funds with a defined use in US dollars should match US dollar assets in terms of time and amount. Do not eliminate the real existing US dollar liability hedge due to a five-year prediction.

For stablecoin holdings that have no US dollar use and are just temporarily waiting to buy the dip, acknowledge that they are a long position in US dollars. Set caps for them. When calculating holding returns, deduct the conversion losses due to the renminbi appreciation, and also account for channel and counterparty risks.

For those holding BTC or ETH long-term, do not mechanically liquidate simply based on predictions of renminbi appreciation. First, check what proportion of your investable assets is occupied by crypto asset positions. Then see if you can withstand a price pullback of over 50%. For assets that fluctuate at this level, exchange rates are not typically the primary risk.

The most practical approach is not to guess a number for 2031, but rather to establish rebalancing rules. For instance, review once every six months. Or adjust when the net exposure to US dollars deviates significantly from the target ratio. This acknowledges a fact: you cannot reliably predict exchange rates, but you can consistently control your losses when you are wrong.

If the renminbi does indeed continue to appreciate over the next five years, those who nakedly hold US dollar cash and stablecoins will pay a clear price. As long as the returns on US dollar risk assets are sufficiently high, they may still cover the drag from exchange rates. However, "may cover" certainly does not mean "US dollar quotes are inherently immune to the appreciation of the renminbi."

Moreover, do not stuff all your money back into any renminbi asset merely because you are bullish on the renminbi. Currency appreciation does not guarantee that stocks will rise, the property market will rise, or that any renminbi asset can provide sufficient liquidity and real returns.

The exchange rate determines which ruler you use to measure returns. Asset quality determines whether there is anything beneath the ruler.

So don’t ask Goldman Sachs which currency they chose for you.

First, ask yourself: when the predictions go wrong, who will pay your debts?

References

Richard A. Meese and Kenneth Rogoff (1983), Empirical Exchange Rate Models of the Seventies: Do They Fit Out of Sample?

Satoshi Nakamoto (2008), Bitcoin: A Peer-to-Peer Electronic Cash System

Bank for International Settlements (2023), Crypto Shocks and Retail Losses, BIS Bulletin No. 69

Circle, Transparency and Stability: USDC Reserve Disclosures

Financial Stability Board (2023), High-level Recommendations for the Regulation, Supervision and Oversight of Global Stablecoin Arrangements