Yuan’s Unexpected Rise Amid Trade Tensions
November 25 – Despite facing a trade war, sluggish growth, remarkably low interest rates, and reduced foreign investment, the yuan has not only held strong but has actually marked its largest annual increase since the pandemic began in 2020.
This subtle but steady appreciation of the yuan has led analysts to speculate that the Chinese government might be reigniting its efforts to enhance the yuan’s global standing.
The People’s Bank of China (PBOC), which keeps the yuan within a specific trading range, has yet to provide any comments regarding its strategies for managing the currency this year.
For market watchers, the context behind the dollar’s ascent reveals much. Back in 2018, the yuan depreciated by about 5% in response to U.S. trade constraints, yet by 2025, it is anticipated to appreciate by nearly 3%.
This upward trend can be attributed to the central bank’s consistent adjustments, which have nudged the market higher most days. State-owned banks’ continuous purchases of dollars have helped stabilize the yuan’s value.
Kelvin Lam, a senior economist, noted that despite rising U.S. trade actions, China’s economic performance has exceeded expectations. He also mentioned a historical parallel, suggesting that China aims to present a stable yuan similar to how it managed to avoid competitive devaluation during the 1998 Asian financial crisis.
However, the PBOC’s daily decisions regarding interest rates have come under scrutiny, especially since they have consistently surpassed market forecasts since last November. Current interest rates remain substantially lower than those in the U.S., and China’s economic growth is hampered by weak consumer spending, with a capital account deficit exceeding $281 billion in the last ten months.
Interestingly, China’s economic strategy also seems to be ramping up. Following years of a cautious approach to promoting the yuan’s international use, the recently released 15th Five-Year Plan has dropped the qualifier “carefully.” This could mean a shift towards a more aggressive stance.
Kiyong Song, a key strategist at Société Générale, stated that showcasing the yuan’s stability amidst market volatility would serve to strengthen China’s push for the yuan’s broader international adoption.
Future Projections
Analysts from investment banks expect the yuan’s rise to persist, emphasizing that the PBOC is a significant factor in this momentum. According to Goldman Sachs, the yuan could reach 7 per dollar by year’s end, increasing to approximately 6.85 the following year as officials become more comfortable with its upward trend. The current rate is about 7.1068 yuan to the dollar.
Since last November, the central bank has more rigidly fixed the point from which interest rates can deviate. Analyses indicate that the gap between the official midpoint and market expectations has averaged around 327 pips since April, reflecting growing acceptance of the yuan.
Moreover, the trading volume of the dollar-renminbi pair has surged nearly 60% since the last survey in 2022, reaching approximately $781 billion, which represents over 8% of global daily currency trades.
Challenges Ahead
Multiple market observers reported that while conditions have stabilized—with state-run banks actively selling the yuan—the volatility of export earnings complicates the signals. The yuan has depreciated by 7.7% against the euro this year and has fallen by 3% against a basket of currencies from its trading partners.
Many experts believe substantial internationalization of the currency won’t happen until China relaxes its regulations on cross-border capital flows, a shift that seems unlikely in the near term. Nevertheless, the yuan’s current momentum and price trends have certainly caught the attention of the market.
Shuang Ding, chief economist at Standard Chartered, suggested that the government’s intention to maintain the yuan’s stable value, while permitting gradual appreciation, may enhance its reputation as a reliable store of value. This policy aligns with China’s broader trade competitiveness and historical effectiveness in managing capital flow fluctuations.
