Ask a currency trader what’s changed and they’ll point to a single line: the People’s Bank of China is nudging the yuan firmer but stopping it from sprinting. On Jan. 9 the PBOC set the USD/CNY central parity at 7.0128 — a touch stronger than the previous fix but deliberately softer than market estimates. The message was subtle and unmistakable: appreciation is tolerated, rapid appreciation is not.
China’s exchange-rate policy has evolved. After years when devaluation was an easy lever — think the 2015 surprise cut or the 2018–20 slide that cushioned tariff shocks — policymakers now prize stability, credibility and a slow, state-directed internationalization of the renminbi. That’s a shift with consequences for exporters, global trade balances and geopolitical bargaining.
A balancing act: stability versus competitiveness
A number of economists argue the yuan is materially undervalued. Former U.S. Treasury official Brad Setser and others calculate a 15–20% effective depreciation since 2021, a gap that has helped swell China’s trade surplus. Markets, too, are pricing a stronger currency; some investment banks now pencil USD/CNY nearer 6.8–6.85 by year-end.
But Beijing isn’t rushing toward full appreciation. The central bank still leans on the fix and intervenes when needed. That approach reflects competing priorities: letting the currency reflect stronger external data (China’s Q4 GDP surprised on the upside and exports have rebounded) while shielding low-margin exporters and fragile patches of the domestic economy — notably property and manufacturing — from a shock appreciation.
Short sentences. Long motives.
Officials publicly emphasize stability. Privately, they fear a rapid gain could provoke retaliation from trade partners or destabilize neighboring currencies. A managed, gradual strengthening reduces the risk of a competitive revaluation cascade in Asia — the kind of regional scramble that wrecked markets during the late‑1990s.
Strategy beyond the spot rate
What’s striking is that China’s goal isn’t to wring out every ounce of export advantage from a weak currency. Instead, authorities are building a parallel architecture: a state-led path to internationalize the yuan without liberalizing capital accounts. Think of it as widening the yuan’s plumbing while keeping the taps under tight control.
That plumbing includes the Cross-Border Interbank Payment System, a bigger offshore CNH market, currency-swap lines, and trials of digital currency payments. These tools aim to make yuan settlement and financing more usable in trade and Belt & Road projects, while avoiding the liquidity vulnerabilities that come with a fully open capital account.
Geopolitics helps explain the caution. The 2022 sanctions on Russia underscored Beijing’s worry about dollar ‘weaponization’ — that access to U.S. dollar liquidity and global payment rails can be withheld. The result: a pragmatic diversification away from dollar exposure, including slower reductions in U.S. Treasuries and more allocations to gold and other reserves.
The arithmetic of re-anchoring
For decades the yuan moved with an informal tether to the dollar. But as China’s trade and political orientation broadens — toward Europe, ASEAN and the Global South — a basket-based anchor (for example, the CFETS index) feels more sensible. Re-weighting toward the euro and emerging-market currencies would give Beijing more policy room when U.S. monetary settings diverge from China’s cycle.
Moving to a broader anchor would also send a political signal: Beijing is preparing for a more multipolar financial order, not a one-off shock to contest the dollar. That switch is already visible in tweaks to the CFETS basket, where the dollar’s share has been lowered over time.
What this means for markets and businesses
- For exporters: gradual yuan strength is manageable; sudden appreciation would compress already thin margins and accelerate relocation of labour‑intensive production.
- For importers and consumers in China: a firmer yuan helps purchasing power and eases imported inflation pressures.
- For global finance: the PBOC’s willingness to set firmer fixes shows it can support a slow revaluation path — but capital controls and illiquid yuan assets mean the currency won’t become a deep, dollar‑like reserve asset overnight.
There’s also a diplomatic angle. In any grand bargaining over sanctions or trade, Washington could seek yuan appreciation as part of a package. That would ripple through supply chains: countries that rely on cheap Chinese inputs could see margins squeezed and prices rise.
Where we might go from here
Expect two things at once: a gentle, managed appreciation bias and active state intervention when the pace threatens macro stability or political objectives. The PBOC is unlikely to let the currency free‑float into a fast climb; nor will it systematically drive the yuan down to chase short‑term export gains.
The broader story is of a China that wants the renminbi to matter more — as a settlement currency, a tool of state finance and a buffer against geopolitical pressure — but on Beijing’s terms. That means patience, tinkering with anchors and a lot of quiet market management. For traders, corporates and policymakers, the new normal is a managed, incremental repricing of the yuan, not a sudden regime change.