The recent sharp appreciation of China's yuan has sparked debate about whether a new upward cycle is beginning. Guan Tao, global chief economist at Bank of China Securities, offered a cautious perspective during the China Wealth Management 50 Forum 2025 annual conference, warning against premature optimism despite current supportive factors.
The yuan's rapid gains—briefly breaking through the psychologically significant 7.0 threshold—have fueled market discussions about currency "revaluation" and potential "new cycles." Guan identified three key drivers: a weakening U.S. dollar, China's persistent trade surplus, and market confidence bolstered by the 5% economic growth target . These factors collectively propelled the yuan's strong performance in recent weeks.
However, Guan emphasized that exchange rate movements aren't linear, highlighting significant uncertainties ahead. He particularly cautioned against assuming sustained dollar weakness, noting historical volatility. "In 2017, the dollar dropped 10%, only to rebound by the same margin in 2018," he observed, suggesting similar reversals could occur.
External stability presents another critical variable. China's Central Economic Work Conference recently acknowledged "deepening external influences," underscoring the need to balance domestic priorities with international economic tensions. Should global demand weaken in 2024, China's growth stabilization efforts could face heightened pressure, potentially impacting the yuan.
Guan challenged the popular notion that yuan appreciation automatically triggers asset revaluation. "Currency and capital markets operate differently," he explained, citing examples where Japanese equities rose amid yen depreciation and U.S. stocks hit records during dollar declines. These cases demonstrate the non-linear relationship between exchange rates and asset prices .
While maintaining long-term optimism about China's capital markets, Guan described exchange rates as "shock absorbers" for short-term economic fluctuations. "Ultimately, economic fundamentals determine currency strength," he concluded. "A strong economy breeds strong currency—in the short run, it's just a buffer." This perspective suggests caution against prematurely declaring a new yuan appreciation cycle.
The yuan's recent strength reflects multiple converging factors, but its trajectory remains uncertain. Market participants would benefit from monitoring evolving economic conditions while avoiding reactionary positions in this complex environment.