Commentary: The Yuan’s Rebound Is Just Beginning

On December 25, the offshore yuan broke the psychologically significant 7.00-per-dollar threshold, soon followed by the onshore yuan. This milestone is viewed as a sign of continued appreciation for the Chinese currency, underpinned by robust economic fundamentals that support its further strengthening[para. 1].

Historically, China’s last major yuan appreciation occurred between November 2022 and January 2023, jumping 8.8% in response to the post-pandemic reopening. However, the rally was short-lived, with gains fading over the next two years due largely to temporary market moves and arbitrage trades. A more pronounced and sustained appreciation began only in May 2025, after a period of consolidation and bottoming out. This recent momentum has given market participants renewed confidence in the yuan’s upward trend[para. 2].

Several cyclical factors have fueled this rally. Key among them was the latest U.S. Federal Reserve rate cut, which narrowed the short-term interest rate gap between the U.S. and China. The financial markets anticipate further U.S. rate cuts in 2026, particularly as a new Fed chairman is to be announced, favoring currencies in lower interest-rate economies. Seasonally, increased foreign-exchange settlements ahead of the Lunar New Year also bolster the yuan. In addition, China’s economic and inflation indicators throughout 2025 significantly outperformed pessimistic early-year forecasts. Furthermore, improved stability in U.S.-China trade relations has reduced incentives for shorting the yuan[para. 3].

On a fundamental level, the yuan remains highly competitive, with its price advantage widening over time. Between April 2022 and June 2025, the yuan’s real effective exchange rate fell by 19%—the largest adjustment since 1990—enhancing the cost advantage of Chinese firms relative to overseas competitors. Since 2020, China’s producer price index (PPI) in dollar terms rose 39 percentage points less than the U.S.’s, and 49 points less than Europe’s. In 2025, China’s GDP deflator is projected to be 2.5 to 3 percentage points lower than in the U.S., with the PPI 4.5 to 5 points lower. These factors suggest that a yuan appreciation of 4-5% annually would not harm export competitiveness. Additionally, with Chinese exporters having left over $600 billion in revenues unsettled overseas since 2022, there remains substantial potential for capital to return to China[para. 4].

Looking ahead, there are several tailwinds. Weak domestic indicators and lower fiscal spending since September imply that China’s fiscal and monetary authorities may be preserving resources for a robust 2026 start, coinciding with the first year of the country’s 15th Five-Year Plan. Recent high-level political meetings reiterated confidence in meeting growth targets for 2025 and a strong beginning the following year[para. 5].

The upcoming visit of U.S. President Donald Trump to China in April 2026 and recent improvements in high-level bilateral engagements have injected further stability into U.S.-China economic relations. The ease in the balance of power and ongoing dialogue, including possible Supreme Court tariff interventions, suggests early 2026 could see further deescalation[para. 6][election_info].

Appreciation of the yuan is likely to lead to stronger foreign investment and capital inflows, easing financial conditions and supporting market liquidity. Unlike typical scenarios where a rising currency tightens financial conditions, China’s situation—marked by rapid cost declines versus the U.S. and Europe—means controlled appreciation will not undermine exports and may even ease trade tensions[para. 7].

The yuan is forecast to reach 6.82 per dollar by end-2026, with China’s nominal GDP growth in dollar terms estimated at 8.5%-9%. This would justify upward revisions in corporate earnings and may attract foreign investors to increase allocations to Chinese assets, reversing the current underweight positions[para. 8].