TOKYO — Economic Outlook for the Chinese Yuan

As we near the end of 2025 and step into 2026, a pressing question in the realm of global finance revolves around the future of the Chinese yuan. Specifically, what strategies will President Xi Jinping implement to enhance the currency’s status on the world stage?

Recently, there have been indications that those close to Xi are uneasy about the yuan’s rapid ascent during these challenging times. The People’s Bank of China has set a fixed interest rate for the renminbi, which currently stands at 7.0733 per US dollar. This rate has dipped around 164 to 179 pips beneath the average noted in a recent survey.

The fluctuation range for the yuan is about 2% up or down, and right now, market speculators anticipate a depreciation of the currency—something quite pronounced since early 2022.

No leading currency analyst predicts a major devaluation of the renminbi in 2026. However, the upcoming year will be significant for Xi as he attempts to position the yuan as a leading global reserve currency.

While the yuan has been gaining traction as a currency for trade and finance, its growth has not quite matched the pace touted by Xi’s advisers over the past twelve years or so.

In the immediate future, the central bank will play a vital role. With China facing deflation, it falls on Governor Ban Gongsheng to navigate Xi’s efforts to bolster confidence in the yuan while also supporting export activity.

As the U.S. Federal Reserve is set to potentially lower interest rates again this month, there are, understandably, worries among manufacturers in mainland China regarding the effects of a weakening dollar on competitiveness.

November saw China’s official purchasing managers’ index remain in the red for the eighth consecutive month, largely impacted by U.S. tariffs affecting factory operations. Manufacturers are grappling with weak domestic demand paired with fierce price competition, expanding uncertainties loom over Chinese businesses.

Yao Yu, the founder of the financial tech firm RatingDog, mentioned that he anticipates December will reveal “weak expansion” within Asia’s largest economy, as manufacturers continue cutting jobs and moderating purchasing volumes.

Barclays economist Jiang Zhang noted that the data might present a false sense of stabilization. Although the current economic downturn highlights weaknesses in domestic demand, increases in new export orders and improvements in shipping metrics suggest that exports remain a crucial factor for growth.

Despite the recent cease-fire in trade relations with the U.S., which is expected to continue until the end of 2026, China’s ongoing real estate turmoil is significantly impacting business and household confidence.

Moreover, President Xi’s ambition to bolster domestic consumption and achieve technological self-sufficiency is encountering many obstacles, particularly without substantial fiscal measures to enhance the financial system’s leverage.

Against this backdrop, Xi and his team are mapping out future strategies for the renminbi. Given the turbulent political climate in Washington, next year may prove to be a vital opportunity for Xi to strengthen the yuan against the dollar.

Moreover, central banks and investors across Asia are currently holding a considerable amount of U.S. Treasury bills, raising concerns over Washington’s hefty $38 trillion debt and ongoing inflationary pressures.

Consequently, 2025 could be seen as a significant moment in the discourse surrounding the renminbi in relation to the dollar. Since Xi assumed power in 2013, one of his top priorities has been to internationalize the renminbi.

The push gained momentum back in 2016, shortly before Trump’s initial election, when Xi included the renminbi among other major currencies in the International Monetary Fund’s “special drawing rights” basket.

According to Zhu Hexin, deputy governor of the People’s Bank of China, the yuan accounts for about 30% of China’s $6.2 trillion global merchandise trade. When cross-border payments are factored in, this share jumps to 53%, with the renminbi increasingly outpacing dollar-based transactions within China.

Nevertheless, the yuan’s presence in global foreign exchange reserves remains subpar. The dollar maintains over 58% of these reserves, while the euro occupies around 20%, and the renminbi accounts for only 2%, as shown by IMF data.

This scenario prompts Xi’s team to strategize on establishing a more robust renminbi framework in anticipation of a forthcoming reckoning with the dollar, which seems welcomed by Trump.

Trump has often discussed the idea of encouraging a weaker dollar, and his “Mar-a-Lago Agreement” aims to force China into accepting an increasingly strong renminbi.

His critiques of the Federal Reserve are largely centered around the dollar’s value. It’s somewhat alarming that Trump has lashed out at Fed Chairman Jerome Powell in unsettling terms, such as calling him a “fool,” which has raised concerns in the market.

Domestically, however, the renminbi’s chances for global popularity are constrained by structural constraints. Eswar Prasad from Cornell University pointed out that China’s unwillingness to fully convert the currency limits Xi’s internationalization efforts.

While China is nominally opening up its markets to foreign investors, the consistent question remains whether there is enough confidence that these capital controls will eventually be lifted for good.

Prasad suggests that the Chinese government must develop a more international capital market framework while enhancing the rule of law and granting the People’s Bank of China increased autonomy. These steps are crucial for building confidence among both domestic and international investors.

“The U.S. is losing its institutional strength,” Prasad noted, “but you don’t need to be perfect to succeed in international finance. You just need a better composition, and the U.S. still offers a difficult proposition to rival.”

Nonetheless, Trump’s policies, particularly punitive tariffs, could directly threaten that advantageous position. Xi might capitalize on the situation by empowering his economic team, including the People’s Bank of China, to promote a stronger yuan.

“The renminbi is indeed undervalued,” argues economist Brad Setzer from the Council on Foreign Relations. “This undervaluation complicates addressing China’s considerable current account surplus while also contradicting the leadership’s aim to boost domestic demand.”

“Instead of strictly controlling the currency against the dollar, now would be the right time for the authorities to allow a significant appreciation against the dollar and on a trade-weighted basis,” Setzer proposed.

Japan offers a cautionary tale here. For too long, Japanese administrations have clung to low interest rates and a weaker yen at the expense of much-needed structural reforms, leaving them with little to show for it.

Even leaders synonymous with economic reform, like Junichiro Koizumi and Shinzo Abe, failed to stop the unsustainable debt-driven stimulus that is currently pushing yields on Japanese government bonds up.

The past two-and-a-half decades of zero interest policies have backfired painfully. The weaker yen has lessened the urgency for lawmakers to enhance competitiveness, thereby relieving pressure on corporate leaders to innovate and drive productivity improvements.

President Xi’s China will surely want to avoid making the same mistakes if it aspires to be a leader in global innovation. The government has a unique opportunity to engage with vulnerable U.S. leaders reminiscent of the climate in 1985, especially as Xi’s “Made in China 2025” initiative undergoes significant shifts.

This situation extends to the Global South, which is charting its own course. There’s a growing skepticism regarding the U.S.’s future trajectory over the coming decade.

Despite Trump’s criticisms of China’s global standing, his actions seem to inadvertently provide the groundwork for China’s economic expansion, particularly in light of the decreased U.S. development aid—creating greater space for Beijing’s Belt and Road Initiative.

Ultimately, China has much at stake. Allowing the yuan to appreciate could signal confidence that Xi’s economy is set up for a strong global presence, potentially attracting even more foreign investments.

However, Setzer argues that it goes beyond mere perception. A weaker renminbi might reinforce the narrative of growing instability as a key factor influencing China’s future.

“A stronger renminbi could elevate real incomes, which in turn would stimulate consumption and services—especially if a more aggressive fiscal policy were employed to foster consumer activity and counteract deflationary trends,” Setzer elaborated.

Setzer is particularly concerned that the recent remarks by the Communist Party meeting suggest a future dependent on a state-led investment model, which may not adequately support household demand.

“This reliance on external demand has contributed significantly to China’s growth, but ongoing policies indicate a dependency on extracting demand from international trading partners,” he warned.