Yuan expected to rise in 2026, but Beijing has its reasons for saying not so fast

Highlights:

• Exports drive 6% yuan gain vs dollar in nine months
• Average of 13 analyst forecasts has yuan at 6.92/dlr in Dec
• Goldman Sachs revises forecast stronger to 6.7

Booming exports are pushing up China's currency and while analysts think authorities will resist further gains, risks are to the upside and could test the country's fragile economy.

As the yuan exchange rate tiptoed toward and then passed the strong side of 7-per-dollar last year, foreign currency flows into Chinese banks hit a record $452 billion in December.

The amount converted to yuan also hit a record of $311 billion, figures from the State Administration of Foreign Exchange showed, with the flow sending the exchange rate to its strongest point since 2023 at 6.9378 per dollar yesterday (3 February).

Bank analysts think that is more or less enough and say a toolkit of semi-official yuan selling, restraining the trading band, persuasive arguments from authorities and tweaks to reserve ratios for the banking system can be rolled out to keep it from gaining further.

An average of 13 forecasts from global investment banks has the currency at 6.92 to the dollar by year's end, while market pricing points to around 6.8 in the derivatives market.

That sort of level is likely to frustrate the country's trading partners, where manufacturers are under pressure from Chinese rivals, and add more fuel to a boom in offshore yuan borrowing.

But out-of-consensus calls point to it rising further if exporters ramp up their yuan conversions, with Goldman Sachs this week raising its 12-month yuan forecast to 6.7 per dollar, about 3.5% firmer than Tuesday's trading level.

"The pace of appreciation has exceeded our expectations and that is even before the sharp move lower in the broad dollar," said Goldman analysts, who based their outlook on record flows and what they viewed as a shift in tone from the central bank.

The People's Bank of China manages the yuan by keeping it inside a band that is 2% on either side of a midpoint that it announces each trading day. It declined to comment on its stance on the currency or on analyst forecasts when contacted by Reuters.

Last month, central bank Deputy Governor Zou Lan said the yuan is expected to experience two-way fluctuations while maintaining flexibility.

Base Case

A stronger yuan erodes a competitive advantage for exporters, so analysts believe a runaway rally is unlikely. They point to state bank selling and signals from the PBOC's midpoint settings as evidence authorities will weigh in against gains.

"Given that China's economic growth is still highly dependent on exports, the People's Bank of China may not yet be willing to risk a more significant appreciation of the currency," said Wei He, an economist at Gavekal Dragonomics.

The PBOC midpoint has been weaker than market estimates since November and – traders say – state banks have been dollar buyers whenever the yuan has started to rise too sharply.

Analysts also expect authorities to adjust foreign exchange reserve requirements, since they could force banks to buy and hold more dollars and offset yuan buying.

"We see a high chance for the 20% risk reserve on banks' forward FX sale to be removed and expect FX reserve requirement ratio to be raised," said Janice Xue, a strategist at Bank of America Global Research.

China's 5% gross domestic product growth last year rested upon an export surge that delivered a record trade surplus of $1.2 trillion, up around 20% from a year earlier.

"Our base scenario remains a strong export performance, which could support the yuan," said Chaoping Zhu, global market strategist at J.P. Morgan Asset Management. "However, as foreign governments become more cautious (about) the impacts on their economies, uncertainties are rising for Chinese export growth."

"This might suggest a higher two-way volatility in the exchange rate," he said, which he thinks is likely to fluctuate in a range around 7-per-dollar. On a trade-weighted basis, the yuan is at the lower end of a range that it has kept since the pandemic, which provides support for exporters.

Upside Risks

Stability has also been the defining feature of the nine-month rally that has lifted the yuan nearly 6% against the dollar, which traders say is aimed at boosting the currency's appeal for investment, lending and reliability for settling trade.

That also holds momentum in check against the risk that a rising currency drives a positive feedback loop where buying from exporters sends it higher, encouraging more buying.

Ding, a Shanghai-based electrical industry exporter who only provided his surname, said his firm was already converting more dollars to yuan more quickly because of recent exchange rate moves.

To be sure, at 68.8%, the proportion of export receipts converted to yuan in December was on the rise, but it was not a record, and analysts believe authorities can manage even bigger flows.

"We expect the level of surplus to go beyond $1 trillion again in 2026," said Kelvin Lam, senior China+ economist at Pantheon Macroeconomics, who expects the exchange rate to be at 6.85 at the end of the year.

"Repatriation of the USD piled outside of China because of trading activity will continue to be a driving force to push (the yuan) to the stronger end, but the PBOC will make sure the appreciation (is) on a gradual, measured pace."