Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why the Yuan Is Winning Against Tariffs in 2026
Transcript
- Lucas: If you've been watching the headlines, the story on China is usually 'yuan under pressure, trade war heating up, stocks sliding.' But look at the actual data over the past few weeks and something strange is happening. The yuan is actually getting stronger. Luna: Yeah, I was looking at that. USD per yuan is down to 6.79 as of late May. That's a modest gain, but it's the direction that's surprising. Lucas: Exactly. And it's not like the macro environment is suddenly friendly. Tariffs are still on, the US trade-weighted dollar index is sitting near 119, and China's own trade surplus is actually shrinking. So why is the yuan bucking the expected trend? Luna: One factor I've seen cited is capital flows. Foreign investors have been buying Chinese bonds at a pretty strong clip. If you're getting a yield advantage and the currency is stable, it's a decent carry trade. Lucas: Right. Chinese government bonds offer a yield premium over US Treasuries, and with the Fed holding rates steady, that spread is attractive. But I think there's a deeper structural shift happening too. Let's talk about the renminbi's role as a reserve currency. Luna: You mean the idea that central banks are diversifying away from the dollar? That's been a slow burn for years. Is there evidence it's actually accelerating? Lucas: There is. The IMF's data on allocated reserves shows the dollar's share has been declining gradually — it's down from about 59 percent a decade ago to around 57 percent now. China's share has inched up to about 2.4 percent. It's still tiny, but the direction is consistent. More importantly, the volume of yuan-denominated trade settlements is growing. Russia, Saudi Arabia, even Brazil are doing more deals in yuan. Luna: That's partly geopolitics, partly just pragmatism. If you're a commodity exporter and your biggest customer is China, it makes sense to settle in their currency. Lucas: Exactly. And that's where we see the 'yuan petrodollar' narrative. Saudi Arabia has been signaling a willingness to price some oil in yuan. That hasn't fully materialized yet, but the trend is real. So the yuan's strength isn't just about capital flows — it's about a gradual shift in the plumbing of global trade. Luna: But doesn't a stronger yuan hurt Chinese exporters? That seems like the opposite of what Beijing would want when they're trying to stimulate the economy. Lucas: It's a tension, for sure. Normally, China would prefer a weaker yuan to support exports. But they're also trying to build credibility as a stable currency. If they let the yuan depreciate aggressively, they spook foreign investors and undermine the reserve currency ambition. So they're walking a tightrope — allowing modest appreciation to signal stability, while using other tools like fiscal stimulus to support domestic demand. Luna: And the timing is interesting. This is happening even as China's trade surplus is shrinking. Exports are still high, but imports are growing faster. That's usually a bearish sign for a currency, but the yuan is ignoring it. Lucas: Right. The trade surplus has been declining — data from March shows it dropped to about negative 60 billion dollars on a goods and services basis. That's a deficit, actually. China is importing more energy, more commodities, more chips. So the traditional current account support for the yuan is weaker. Yet the currency is holding up. That tells you the capital account is driving the move. Luna: And part of that capital account story is the People's Bank of China managing expectations. They've been very careful not to let the yuan break out of its trading band. Lucas: Exactly. They set the daily fixing rate consistently stronger than market expectations, which sends a signal. It's a form of 'leaning against the wind' — they don't want a one-way bet against the yuan. And it's working. The offshore yuan is trading very close to the onshore rate, which suggests limited speculative pressure. Luna: So what does this mean for the rest of Asia? If the yuan is strong, it gives other Asian currencies some breathing room. Lucas: That's an important point. The Japanese yen, for instance, has been under pressure for years. But if the yuan stabilizes or appreciates, it eases the competitive devaluation pressure. South Korea, Taiwan, even Southeast Asian exporters benefit from not having to race to the bottom against a weakening yuan. So this is actually a net positive for the region's currency stability. Luna: But there's also a risk. If the yuan strength is artificial — propped up by PBOC intervention — it could create a misalignment that eventually snaps back. Lucas: That's the worry. If capital flows reverse or the trade picture deteriorates further, the PBOC might not be able to sustain the current level. But for now, the market is buying the story. The yuan is trading at 6.79, and it feels like the PBOC is comfortable with it. The real test will come if we see a sharp escalation in tariffs or a global risk-off event. Luna: And right now, the headlines are dominated by tech stocks hitting records and AI IPOs, not by trade wars. So maybe the yuan is benefiting from a 'risk-on' mood where investors are dipping into emerging markets. Lucas: That could be part of it. The S&P 500 hit a record today, and if global risk appetite stays strong, capital flows into EM debt and currencies could continue. China bonds are a big part of that. So the yuan strengthening might actually be a sign that the market is looking past trade tensions for now. Luna: It's a fascinating dynamic. The currency market is saying something different from the trade data or the political headlines. Lucas: If today's episode made something click for you — whether it's the yuan's dual role or the broader shift in global reserves — the way we keep this show ad-free is through listener support. You can head to buy me a coffee dot com slash fexingo. It's a low-key way to help us keep doing these deep dives. Luna: And it really does make a difference. Just a small contribution helps us cover research time and hosting costs. Lucas: All right, back to the yuan. So what should listeners watch for in the coming weeks? I'd say focus on the PBOC's daily fixing. If they start setting it weaker, that's a signal they're worried about export competitiveness. But if they keep it strong, they're prioritizing the reserve currency narrative. Luna: And also watch the Japanese yen. If the yen weakens sharply again, it could drag the yuan down with it, because China doesn't want to be too far out of line with its main regional competitor. Lucas: Exactly. So the yuan story isn't just about China — it's about the entire Asia-Pacific currency ecosystem. And for now, the message from the market is: the yuan can withstand the tariff noise, at least for a little while longer. Luna: It's a good reminder that currency markets often tell a more nuanced story than the political headlines. Lucas: Alright, that's it for today. We'll be back tomorrow with another angle on China's economy.