Commentary: Why the Yuan Is Soaring

The yuan has experienced two significant waves of appreciation since April 2025. The first wave reflected the weakening of the U.S. dollar, while the second represented a revaluation of yuan-denominated assets. In comparison to the euro and the yen, which repriced earlier, the yuan initially lagged due to concerns over the impact of the trade war on Chinese exports. However, as Chinese export strength became evident and the stock market surged, the yuan began a catch-up rally, correcting earlier pessimistic sentiment. This was seen in increased foreign exchange settlements from July onwards, signaling renewed confidence in the Chinese economy.[para. 1][para. 2]

A sharp movement occurred on August 28, 2025, when the yuan surged against the dollar: the onshore yuan gained over 330 basis points, and the offshore by more than 440 basis points in a single day. This spike was driven by a combination of external, internal, market, and policy factors. Firstly, Federal Reserve Chair Jerome Powell’s pivot to a dovish policy stance weakened the dollar further. U.S. labor markets softened (July nonfarm payrolls dropped to 73,000, below expectations), and inflation—contrary to tariff fears—remained subdued, with July’s core CPI increasing by only 0.3% month-on-month. Powell hinted at a September rate cut at the Jackson Hole conference on August 22, causing optimistic expectations for U.S. monetary easing and a weakening dollar, which contributed to the yuan’s appreciation.[para. 3][para. 4][para. 5][para. 6]

Secondly, the People’s Bank of China (PBOC) accelerated the rise of the yuan’s midpoint rate, fueling appreciation expectations. From a midpoint of 7.13 on August 22, it was rapidly adjusted to 7.12 on August 25 and 7.10 on August 29. This policy move directly led to the sharp appreciation observed at the end of August.[para. 7][para. 8]

Thirdly, August saw a substantial surge in Chinese asset prices, notably the Shanghai Composite Index approaching 3,900—a decade high. Chinese equities outperformed global peers significantly. This performance drew capital inflows to China, boosting the yuan further. In addition, easing geopolitical tensions—highlighted by U.S.-China talks on trade tariffs—contributed to a positive shift in expectations.[para. 9][para. 10]

In the short term, the recent rapid appreciation of the yuan is expected to subside for two reasons. First, the PBOC signaled it aims to maintain exchange rate stability and avoid “overshooting,” suggesting no significant further appreciation is likely. Excessive appreciation could harm exports. Second, the impact of foreign exchange settlements boosting the yuan is expected to wane, as exporters front-loaded sales earlier in the year to avoid tariff risk. The confluence of supportive factors seen in August (dovish Fed, strong Chinese assets, currency policy moves) makes a repeat unlikely, and the pace of appreciation should moderate.[para. 12][para. 13][para. 14]

Looking to the medium and long term, several factors support further yuan appreciation. Global capital appears to be reallocating toward Chinese assets after years of overinvestment in U.S. equities. Renewed confidence in A-shares due to policy shifts and successes in high tech has begun to reverse previous trends, with even a normalization of global fund holdings potentially lifting A-shares and the yuan. Resilient Chinese exports—fueled by market expansion in emerging economies, competitive pricing and quality, and the AI-driven electronics boom—are also expected to underpin the yuan’s value in the coming year.[para. 16][para. 17][para. 18][para. 19][para. 20]