Analysis: Why China’s Yuan Is Set to Strengthen
By Xu Xiaoqing
After U.S. President Donald Trump launched a global tariff war on April 2, the dollar fell sharply. Yet unlike other major currencies, the Chinese yuan did not follow the typical pattern of strengthening against a weakening greenback.
This reflects market concerns that China might be allowing depreciation to offset potential export losses.
However, this assumption overlooks the increasingly weak link between exports and yuan movements. Rather, the redback’s future path hinges more on the Federal Reserve’s rate cycle and domestic corporate profitability.
Decoupling
Historically, the yuan has shown a relatively strong correlation with China’s export performance.
However, since the second half of 2023, this relationship has weakened significantly. While export growth has recovered steadily, the yuan has stayed in a band roughly between 7 and 7.3 against the dollar, showing no sign of significant appreciation.
Moreover, since the U.S. first imposed additional tariffs on Chinese goods in 2018, Chinese exports have remained resilient, but the yuan has depreciated from around 6.3 to about 7.2 against the dollar. This suggests that exports are no longer the primary driver of the currency’s trajectory.
External drivers
Among external factors, U.S. interest rates may now play a larger role in shaping yuan dynamics than China’s own monetary policy.
From July to September, for example, as markets began pricing in Fed rate cuts, the yuan appreciated by around 3%. That was driven by a surge in demand from Chinese exporters to convert their dollar earnings into yuan.
Meanwhile, the volatility in U.S. tariff policy is increasingly presenting downside risks to American employment, particularly in small and midsize enterprises (SMEs), while its upward impact on inflation appears more contained.
Although U.S. nonfarm payroll data for April exceeded expectations, a closer look at sectoral composition suggests softness beneath the surface, showing early signs of the tariff war’s impact on SME hiring. If SME hiring worsens significantly, the Fed may be compelled to accelerate its easing cycle.
Domestic fundamentals
On the domestic front, the return on equity (ROE) of nonfinancial listed companies serves as a useful proxy for the investment appeal of yuan-denominated assets. Historically, the correlation between the ROE trends and the yuan’s trajectory has been notable. Since 2021, as the corporate ROE has suffered a prolonged downturn, the yuan has concurrently weakened.
But signs of a turnaround have emerged. First-quarter earnings reports indicate a preliminary stabilization in the ROE among these firms. Meanwhile, industrial capacity utilization has edged higher year-on-year, and the drag from the real estate sector appears to be diminishing. This suggests that Chinese corporates may be entering a new earnings upcycle in the latter half of the year.
New cycle
Putting these factors together, it appears increasingly likely that the yuan’s four-year depreciation phase is drawing to a close. As the Fed pivots toward rate cuts and Chinese corporate profitability improves, conditions are aligning for the yuan to enter a new appreciation cycle.
Historical precedents support this view. In both 2016 and 2019, inflection points in the listed companies’ ROE marked the bottom of corporate earnings cycles; the domestic stock market typically began rebounding ahead of those ROE recoveries; and the yuan tended to lag behind, with its appreciation cycle beginning eight to 10 months after the stock market had entered bull territory.
If history is any guide, the latest turning point in China’s equity market — which took place in September — suggests the yuan is likely to begin appreciating between May and July, a process that may already be underway.
Xu Xiaoqing is director of macro strategy at Zhejiang province-based DH Fund Management Co. Ltd.
This article has been edited for length and clarity.
Contact editor Lin Jinbing (jinbinglin@caixin.com)
caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.
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