After the introduction of "reciprocal tariffs" by U.S. President Donald Trump in April 2025, the exchange rate of the Chinese yuan against the U.S. dollar began to gradually recover. Recently, the pace of this recovery has noticeably accelerated. Market observers have noted that following the Jackson Hole Symposium, the yuan's central parity rate started to rise rapidly from August 25. On August 22, the dollar to yuan central parity rate stood at 7.13, and by August 25, it had risen to 7.12, with further increases bringing the rate to 7.10 by August 29. On September 1, although the yuan's central parity rate adjusted slightly, it remained at 7.10. This upward movement in the central parity rate has signaled a policy shift and fueled expectations of further yuan appreciation.
The yuan has appreciated quickly against the dollar, with the onshore yuan surging by over 330 basis points on August 28, while the offshore yuan saw a rise of more than 440 basis points, setting a new high since December 2024. Since September, the yuan’s central parity rate has fluctuated between 7.10 and 7.11, with the rate on September 4 reported at 7.1052, reflecting another increase of 56 basis points.
This trend shows that the yuan's central parity rate, which has been characterized by rapid increases and slower declines, is now stabilizing around the 7.1 mark. According to data from the website of China Foreign Exchange Trade System (CFETS), as of September 3, the yuan's central parity rate has appreciated by a cumulative 386 basis points since August, and by a total of 776 basis points year-to-date. This year, both onshore and offshore yuan against the dollar have appreciated by 2.08% and 2.61%, respectively. In contrast to the "rapid decline, slow rise" trend of recent years, the current trajectory of the yuan is clearly strengthening, which defies earlier predictions. The market now generally expects further yuan appreciation against the dollar. Analysts believe this reflects a temporary easing of U.S.-China tensions and a delicate balance maintained by the Chinese central bank between stabilizing economic growth and preventing capital outflows. Some institutions have even projected that the yuan could once again drop below the 7.00 mark against the dollar.
The recent changes in the yuan's exchange rate are largely attributed to fluctuations in the U.S. dollar. A series of trade protectionist policies, including Trump’s "reciprocal tariffs", have disrupted the global trade order and raised concerns over the credibility of the U.S. government. As a result, the dollar, which had peaked above 104, has begun to decline significantly. Currently, the U.S. dollar index stands at around 97, having dropped by approximately 9.80% this year. Most studies, including those by ANBOUND, suggest that the weakening of the dollar is due to several key factors. First, Trump's reciprocal tariff policies may suppress domestic consumption and, at the same time, weaken the competitiveness of American businesses, thereby dampening economic growth. Second, the Federal Reserve may lower interest rates in September, reducing the interest rate differential between the dollar and other currencies. Third, Trump's pressure on the Fed, which threatens the central bank's independence, has further undermined international confidence in the dollar. Fourth, the continuous expansion of the U.S. government's debt is putting increasing pressure on U.S. Treasury bonds. Of course, the depreciation of the dollar is beneficial for boosting American exports and reducing the trade deficit. Given these factors, the logic behind the dollar's weakness is likely to persist for some time.
However, as was the case before April, reciprocal tariffs may still exert pressure on other currencies, potentially leading to depreciation. On one hand, negotiations between Trump and various countries, especially with China, remain fraught with uncertainty. If tariff levels exceed expectations, it could create downward pressure on the currencies of the affected countries. On the other hand, if inflation in the U.S. outperforms expectations during the Fed's efforts to achieve a soft landing, a slower pace of interest rate cuts could trigger capital inflows back into the U.S. Particularly in the context of increasing fragmentation in Europe and escalating geopolitical risks in the Middle East, while the dollar's position has weakened somewhat, it remains the dominant currency for global trade settlements and continues to serve as a primary safe haven for capital. Of course, if employment conditions in the U.S. improve and the positive trend strengthens, the dollar is likely to regain its strength.
If the dollar is the largest external factor influencing the stability of the yuan's exchange rate, the yuan now faces a new challenge: the widening gap between the U.S. dollar and other currencies. This creates a dilemma for the yuan. Despite a nearly 10% depreciation of the dollar, the yuan's appreciation against the dollar has been relatively modest, rising only 2.93% this year. This means that, compared to other non-U.S. currencies, the yuan has actually depreciated somewhat, widening the gap between the yuan and other affected currencies.
While the yuan has appreciated against the dollar, data from the CFETS website shows that on August 29, the CFETS RMB Index, which reflects the yuan's movements against a basket of currencies, stood at 96.57, a decrease of 4.8% from the end of last year. This indicates that, in fact, the yuan has been depreciating against a basket of currencies. According to analysts, since the beginning of the year, the yuan has depreciated by about 9.3% against the euro, 3.85% against the yen, 11.78% against the Swiss franc, and 7.92% against the British pound.
There is some market divergence on how to address this split. Some advocate for the strategy of aligning the yuan with the dollar, while others hope the yuan can move in sync with other non-U.S. currencies, narrowing the value gap while increasing pressure on the dollar. After all, if the yuan were to “link” to the dollar, as during the pandemic, it would essentially mean deeper economic ties with the U.S. in trade and investment, further increasing reliance on external economic cycles. On the other hand, if the yuan moves in step with other currencies, its appreciation against the dollar would increase, which could also lead to China’s domestic asset bubbles and undermine its economy.
It is precisely this dilemma that makes the market likely to view changes in the yuan's central parity rate as a policy choice, which could easily lead to a one-way market. In fact, recently, there has been an increase in speculative activity betting on the yuan’s appreciation, mainly driven by the potential for such swings. To avoid speculative one-way trading, the yuan’s central parity rate has been adjusted using a "rapid appreciation, gradual decline" approach.
For example, Goldman Sachs views this as a form of forward-looking exchange rate management: the People’s Bank of China (PBoC) is guiding yuan expectations through gradual appreciation. It notes that the 30-day implied volatility of dollar/yuan has dropped to around 4.2%, the lowest level since 2022, and significantly lower than that of the yen (7.1%) and the euro (6.5%), highlighting the controlled volatility of the RMB. Goldman Sachs believes this “controlled appreciation” model brings about an asymmetric effect: when the dollar strengthens, the yuan shows greater resilience, and during the time when the dollar weakens, the pace of yuan appreciation slows. This suggests that whether the yuan/dollar exchange rate breaks below 7 may not be a symbolic indicator, but rather just part of broader market fluctuations. In fact, the primary goal of the yuan exchange rate policy is neither appreciation nor depreciation, but to maintain the stability of the currency’s value, the foundation of economic stability.
Therefore, although the yuan may see some short-term rebound, the long-term risks have not been eliminated, and this appreciation may not be highly sustainable. It is still likely to adjust in response to increasing external risks. The optimistic outlook on the yuan is largely based on positive expectations for China's economic stability and is built upon the market's habitual thinking. Hence, with domestic demand in the country still under considerable pressure, the fundamentals of the yuan exchange rate are far from fully solidified. That said, a weakening dollar does in fact create room for further monetary easing in China, which is more favorable for the recovery of the Chinese economy and also supports the stability of the yuan exchange rate.
Hence, it appears that the guiding philosophy behind the yuan exchange rate policy is not entirely dependent on the movement of the dollar. On one hand, although the geopolitical competition between the U.S. and China significantly affects the yuan exchange rate, it is not the sole driver of its fluctuations. On the other hand, the yuan exchange rate trajectory, without altering its broader trend, places greater emphasis on being "orderly" and "stable". As it stands, Chinese policymakers focus on preventing sharp fluctuations that could trigger market panic. Therefore, the yuan central parity rate has remained in a state of orderly adjustment over the long term, showing a certain degree of divergence from market rates, both onshore and offshore.
As ANBOUND’s founder, Kung Chan has pointed out, the appreciation or depreciation of the yuan is primarily determined by internal stability. Against this backdrop, Chinese policy will need to avoid instrumentalizing the exchange rate and instead uphold its stability under conditions of “reasonable equilibrium” to mitigate external shocks, whether those shocks are positive or negative. At present, many hold the misconception that yuan appreciation and capital inflows are indicators of a steadily improving Chinese economy. In reality, exchange rate fluctuations are influenced by many factors, including economic fundamentals, liquidity conditions, and trends in trade and investment, and thus cannot serve as definitive indicators on their own. If we consider the trajectory of the Japanese yen following the Plaza Accord, it becomes clear that whether a currency appreciates or depreciates, once it moves beyond its real value, the benefits are limited. Exchange rate movements ultimately reflect the interactions between domestic and international economic cycles, and should be viewed by in a more rational and measured way.
In terms of the yuan exchange rate trajectory, researchers at ANBOUND have previously noted that under the current trend of deglobalization, stability is the better choice when it comes to exchange rate policy decisions. While yuan depreciation can help lower the cost of export goods and promote exports, it also tends to increase capital flows, affect domestic asset prices, and, in turn, impact domestic demand in China. Conversely, placing too much emphasis on its appreciation may encourage capital inflows, but it also puts additional pressure on exports subject to retaliatory tariffs. Although appreciation may enhance purchasing power and support the expansion of the Chinese domestic consumer market, it also raises the cost of labor competitiveness. This can lead to further offshoring of labor-intensive industries, exacerbating the trend of industrial "hollowing out". For these reasons, ANBOUND has consistently advocated for maintaining yuan exchange rate stability as the central theme of China's exchange rate policy.
Beyond simply maintaining stability, the yuan now faces the deeper challenge of establishing its own independent credit foundation, especially as the dollar weakens and divergences between major currencies widen. The structural differences between the Chinese and U.S. economies, coupled with the rise of deglobalization, suggest that the yuan can no longer rely on the dollar's credibility and must "re-anchor" itself. According to Kung Chan, China’s growing economic strength and expanding domestic demand are gradually supporting the yuan’s intrinsic creditworthiness. This shift requires prioritizing internal balance through monetary policy, including two key steps: first, linking its currency issuance more closely to Chinese sovereign credit via government bonds, and second, increasing gold reserves to compensate for any loss of trust during the re-anchoring process. Though this transition must be handled cautiously, it is a necessary path for the yuan in the context of ongoing U.S.-China geopolitical tensions.
Final analysis conclusion:
The yuan central parity rate has shown a pattern of “rapid appreciation and slow depreciation”, which is a measured adjustment in response to the yuan strengthening against non-dollar currencies amid a weakening U.S. dollar. This adjustment is not one-sided and involves many uncertainties. In the short term, the yuan exchange rate still requires stability. In the long term, the need to establish a sovereign credit foundation for the Chinese currency is becoming increasingly important.
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Wei Hongxu is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.
