Since the beginning of the year, the yuan has appreciated by 2.3% against the US dollar, reaching 7.14 yuan per dollar.
The currency’s appreciation could have implications for trade negotiations between China and the United States.
During his first term, the new U.S. President, Donald Trump, accused Beijing of currency manipulation.
“It’s a signal to the United States,” said Mitul Kotecha, head of currency strategy at the British bank Barclays. “China wants to show, in good faith, that it does not intend to devalue the currency,” he added.
Despite its strengthening, the yuan has underperformed compared to other major currencies this year, such as the euro and the yen, which appreciated by 13.2% and 6.2% respectively against the dollar.
Goldman Sachs’ chief economist for Asia-Pacific, Andrew Tilton, suggested that U.S. authorities may be encouraging several countries to allow their currencies to appreciate.
The relative stability of the yuan against the falling dollar benefits Chinese exports but increases pressure on the industrial sectors of other countries, whose stronger currencies make exports to the US more expensive.
China’s trade surplus reached $685.5 billion (€585 billion) in the first seven months of this year and approached one trillion dollars in 2024, which, according to several economists, supports the value of the currency.
“In general, when there is such a large trade surplus, you would expect the exchange rate to move towards balance,” Tilton stated. “The yuan appears undervalued based on traditional indicators,” he explained.
China has long-term ambitions to increase the international use of the yuan, and in a context of dollar volatility, maintaining a stable exchange rate policy enhances the currency’s attractiveness to foreign investors.
“There is a desire to encourage state and sovereign investors to consider the yuan as an alternative,” said Edmund Goh, investment director of fixed income at the investment bank Aberdeen. “If the yuan can stay strong in an unstable environment, it’s a good opportunity,” he added.
The recent increase in shares listed on the Chinese mainland has also contributed to the yuan’s appreciation, according to Jason Pang, portfolio manager at JPMorgan Asset Management.
Chi Lo, senior strategist at BNP Paribas Asset Management, warned that only a significant increase in foreign investment in Chinese assets could push the currency below seven yuan per dollar levels.
For this, he emphasized, it will be necessary to resolve structural problems in the real estate market and combat deflation. “Economic policy needs to be more assertive to reverse the situation. That will bring back portfolio investment flows,” he stressed.
