Commentary: The Mighty Yuan Makes a Comeback

Since late November 2025, the Chinese yuan (CNY) has experienced a significant and rapid appreciation against the U.S. dollar (USD), culminating in the offshore yuan breaching the symbolic 7.0 level against the dollar on December 25, with the onshore rate close to following suit. This marks a notable strengthening trend for the currency through 2025. [para. 1]

The yuan's ascent has been driven by four main forces. First, the weakening of the U.S. dollar has mechanically lifted the yuan. Market expectations of a slowing U.S. economy and impending Federal Reserve rate cuts have contributed to this weakness, alongside President Donald Trump’s policy actions—tariffs abroad and domestic tax cuts—raising concerns about the U.S. fiscal outlook. The dollar index, which started the year around 110, fell to about 96 by mid-2025 and fluctuated between 96 and 100 until dropping further to approximately 97 as the yuan’s rally intensified after November 21. [para. 2][para. 3]

Second, China’s stock market has experienced a bullish phase, boosting the allure of yuan-denominated assets. A significant turnaround occurred following a pivotal Politburo meeting in September 2024; since then, Chinese equities (notably the Shanghai Composite Index and the tech-focused ChiNext board) have outperformed, prompting a shift in foreign investor sentiment towards China’s tech and growth sectors. [para. 4]

Third, year-end demand from Chinese exporters to convert dollar earnings into yuan has created a self-reinforcing appreciation cycle; the prospect of further appreciation incentivizes exporters to settle foreign revenues quickly, which then puts additional upward pressure on the yuan. [para. 5]

Fourth, the People’s Bank of China (PBOC) has implemented active policy guidance to ensure a stable yet firm appreciation of the yuan. After initially counteracting depreciation pressure resulting from U.S. tariffs, the PBOC employed its counter-cyclical factor, adjusted fixing rates, and leveraged market sentiment to guide the currency steadily from about 7.35 to below 7.0 per dollar, balancing market forces and policy intent. The PBOC has also acted to restrain overly rapid yuan gains since early December. [para. 6]

Conventional wisdom suggests a stronger currency harms exports. In practice, what matters most is the yuan’s real effective exchange rate (REER) against a basket of currencies, adjusted for inflation differences. A stronger yuan reduces import costs but can squeeze exporters’ margins and erode price competitiveness, especially when most global trade settles in USD. Nevertheless, if other currencies appreciate more sharply versus the USD than the yuan does, Chinese export competitiveness can actually improve. [para. 7][para. 8][para. 9][para. 10]

Throughout 2024 and 2025, the yuan’s nominal effective exchange rate remained above pre-pandemic levels, but subdued domestic inflation and higher foreign inflation have resulted in a lower REER, making Chinese exports more attractive and supporting robust export growth. [para. 11][para. 12]

Looking ahead to 2026, the yuan’s momentum versus the dollar is likely to persist, with 6.8 cited as the next threshold. Factors supporting the yuan include a possibly slower U.S. economy, ongoing Fed rate cuts, resilient Chinese exports, and a continued equity bull market. The yuan remains undervalued on a purchasing power parity basis, and its appreciation could help rebalance trade, lower import costs, and boost Chinese purchasing power, provided policymakers avoid destabilizing speculation. [para. 13][para. 14]

Risks of reversal persist, particularly if the U.S. economy proves resilient, other major currencies weaken further, geopolitical shocks increase dollar demand, or additional Western tariffs hit Chinese exports. [para. 15]

For exporters, the focus should be on core business operations and risk management through currency hedging or yuan pricing, as the currency’s internationalization progresses. In the first half of 2025, yuan-settled cross-border goods trade made up 28.1% of China’s total, showing substantial growth from the previous year. [para. 16]