There is an outlook that the Chinese yuan will post its best performance since 2020 this year despite U.S.-China tensions. The yuan is showing stronger upward pressure than the dollar and is set to log the biggest annual gain in five years. Analysts say this strength has been driven by a boom in China's capital markets and continued dollar weakness, along with ▲ improved U.S.-China relations ▲ expectations for economic growth following the release of the draft of the 15th five-year plan (2026-2030) ▲ actions by financial authorities ▲ increased settlement demand from corporations.
According to Bloomberg on the 2nd (local time), the yuan has risen 4% against the dollar this year despite the U.S.-China tariff war. That contrasts sharply with the first-term trade tensions under the Donald Trump administration in 2018-2019. Back then, after peaking in Mar. 2018, the yuan fell more than 13% through Sep. 2019. This year, too, the yuan weakened when the tariff war broke out in April and remained soft due to China's economic slowdown, but it turned to recovery from August as global appetite for risk assets increased. Meanwhile, the dollar fell 7%, and the yuan strengthened by a larger margin than the dollar.
◇ Agreement between U.S. and Chinese leaders, expectations for China's five-year plan
Local securities firm Guangfa Securities summarized four reasons for the yuan's strength. First, as U.S.-China tensions have moved toward a resolution recently, export uncertainty has eased. On the 30th of Oct., the two countries' leaders held talks in Busan and agreed to a truce in the tariff war, and they are now in the process of implementing the pledges. Reciprocal state visits are also scheduled for next year.
The second factor is expectations for the upcoming five-year plan. The recommended draft of the "15th five-year plan" released at the end of Oct. sets a goal of achieving "moderately developed country" status and presents measures for science and technology and industrial development, economic stimulus, and market opening to that end. Around the same time, the National Development and Reform Commission touted outcomes including injecting a total of 500 billion yuan (about 104 trillion won) in policy finance, supporting more than 2,300 projects, and reaching 7 trillion yuan (about 1,456 trillion won) in project investment, lifting expectations for economic growth.
◇ Led by the Central Bank, backed by corporations' settlements
Third is the Central Bank's steps, including revaluing the central parity rate and issuing bonds. According to Guangfa Securities, the yuan's central parity rate stayed in a strong range throughout November, which raised expectations for yuan gains in the offshore market. In addition, on the 24th of last month, the People's Bank of China issued 45 billion yuan (about 9.3667 trillion won) of yuan-denominated bonds in Hong Kong, which spurred demand for yuan and helped cement its strength.
A seasonal increase in corporations' settlements in the fourth quarter is also a major factor. Typically in the fourth quarter, export corporations concentrate their demand to convert foreign-currency income before year-end, and this year Chinese export corporations generally posted solid results, boosting conversion demand compared with previous years. In addition, because it is unclear whether the U.S. Federal Reserve (Fed) will cut rates in December, there is also a tendency to lock in yuan receipts by rushing to settle within a relatively favorable exchange-rate range before dollar volatility rises.
◇ Outlook for the yuan in 2026 is also optimistic
The yuan's strength is expected to continue next year. Experts noted the "7 yuan per $1" level could be broken. Li Lin, head of Asia research at Mitsubishi UFJ Financial Group (MUFG), said, "Rate cuts by the U.S. Fed will induce dollar weakness and support the yuan and Asian currency overall," projecting the yuan to reach 6.95 per dollar by the end of next year.
Goldman Sachs analyzed that the dollar-yuan rate could drop to 6.95 within three months and to 6.85 in a year, and Australia and New Zealand Banking Group (ANZ) also said, "One of the best trades in 2026 will be 'sell dollars–buy yuan,'" adding, "Before the Lunar New Year, corporations may massively convert their foreign-exchange receipts and dollar assets deposited at banks into yuan."
However, a stronger yuan could cause side effects such as an economic slowdown due to weaker export competitiveness, so authorities appear to be moderating the pace. Bloomberg said, "The People's Bank of China, China's Central Bank, recently set the central parity rate at a level below market expectations. This is interpreted as a signal to deliberately set a weaker central parity to somewhat slow the pace of yuan appreciation."