Yuan’s sprint slows to a jog

THE yuan’s recent run sets up a year ahead where momentum, policy signals and capital flows decide whether gains stretch further into 2026. Markets look forward with a sense that the next phase hinges less on valuation arguments and more on how fast appreciation is allowed to travel.

Maybank Investment Banking Group Research (Maybank IBG) notes that betting against the US dollar via the offshore yuan has become a popular trade as views build that the Chinese currency is cheap and the greenback lacks clear direction.

“Shorting the US dollar against yuan was a trade that gained traction into 2026 amid calls that the yuan is severely undervalued, an annual goods trade surplus that exceeded U$1 trillion and a rather directionless US dollar,” the investment banking group says.

“We continue to hold a rather sanguine view on the yuan but the People’s Bank of China (PBoC) seems rather adamant on dampening the pace of its appreciation,” it adds.

Maybank IBG states that it expects the yuan to strengthen further, especially in the first half of 2026 if first, exports continue to sustain its growth, second, tourism arrivals rise (narrowing its tourism deficit), and third, equity-related inflows continue to remain supportive of the yuan.

“However, the third factor is likely to play a more decisive role in driving the yuan higher as supports for domestic demand, advanced technology continue to lift growth and equities, forming a virtuous circle with consumption, private investment and yuan,” it argues.

Managing appreciation

Daily policy signals reinforce the idea that strength is tolerated but managed.

China over the week set its daily reference rate for the yuan weaker than seven per US dollar, in a sign the central bank is keen to slow the currency’s gains in the face of recent weakness in the greenback, as reported by Bloomberg.

The PBoC set the so-called fixing at 7.0014 against the US dollar, weaker than all nine estimates in a Bloomberg survey, putting it close to the deepest discount to the onshore yuan since 2023.

According to Bloomberg, the central bank allows gradual strengthening to reflect dollar weakness and capital inflow optimism, while guarding exporters and avoiding rapid fund repatriation.

“The signal, if there was an intentional one, is that the authorities want to prevent a large appreciation move as we enter a seasonally strong period for the yuan,” Khoon Goh, head of Asia research at Australia & New Zealand Banking Group, tells Bloomberg.

“However, this is about managing the pace of appreciation, rather than trying to halt it,” he adds.

Meanwhile, an analyst notes that the strengthening of the yuan will be supportive of the ringgit’s exchange rate against the US dollar.

The ringgit has a strong positive correlation with the Chinese currency due to the significant trading relationship between China and Malaysia.

The macro context remains supportive of yuan’s strength. Bloomberg notes a fresh catalyst as the US dollar sells off amid renewed questions about United States asset appeal, while the yuan pushes past the closely watched seven-per-US dollar level and outperforms Asian peers.

A record trade surplus, capital repatriation and optimism toward local stocks all point to further gains.

Strong growth

Maybank IBG drills into those pillars. On trade, it expects support to moderate.

China posts strong export growth in 2025, with a goods trade surplus of almost US$1.2 trillion, contributing meaningfully to gross domestic product growth.

That impulse is set to fade as subsidies are reduced and policies tilt toward domestic consumption and investment, lifting imports.

The brokerage expects net exports’ contribution to growth to halve, implying a more moderate support for the yuan this year compared to 2025.

Tourism offers steadier help, but not without offsets. The narrowing services gap lent support in 2024-2025 as arrivals more than doubled following simplified visa procedures.

Outlooks remain upbeat, yet a stronger currency also raises outbound purchasing power.

Maybank IBG expects that “the tourism services deficit may not narrow as much this year”, tempering the net lift.

Equities carry the heaviest weight. Despite a rising Shanghai Composite Index, data show equitty inflows have room to build.

Even so, an uptrend in debt and equity flows already supports the yuan and this could extend well into 2026.

Surveys suggest depositors grow more willing to invest as saving intentions plateau, while consumption appetite lags.

History shows equity performance and the yuan “tend to walk in locked-steps”, Maybank IBG says, arguing that continued market strength is needed for wealth effects to feed spending.

With policy pledges to support domestic demand and advanced technology, it sees a potential virtuous circle where growth prospects lift equities, draw inflows and reinforce the currency.

That loop may extend to corporates.

Net foreign-exchange settlement on behalf of clients jumps to nearly US$100bil in December.

While much reflects export receipts, Maybank IBG notes conversion ratios rise within normal ranges and foreign currency deposits sit at sizeable levels, leaving scope for momentum-driven conversion even if signs are limited for now.

Policy communication rounds out the picture.

On Jan 15, a deputy governor of PBoC says there is no need for China to depreciate yuan for competitiveness, adding that two-way fluctuation and flexibility remain the goal.

With the US dollar softer and tensions easing, the onshore pair breaks key levels, yet fixing behaviour stays cautious.

The trade-weighted index continues a gradual rise, suggesting competitiveness pressures coexist with deflationary offsets at home.

Interest rate guidance hints at room for reserve requirement ratio cuts and lower rates on structural tools, underscoring why authorities prefer to moderate appreciation while domestic demand stays fragile.

Overall, Maybank IBG expects the yuan’s average exchange rate to strengthen to 6.99 against the US dollar by the fourth quarter of 2026, compared with 7.03 in the first quarter of this year.