The Chinese yuan has broken through a new key level. On February 12, both the offshore and onshore yuan strengthened past 6.9 against the US dollar, marking the highest level in 33 months, since May 4, 2023.

While exchange rate fluctuations are normal, some nations have attributed their trade deficits with China to what they call an "undervalued yuan." Amid such accusations, there have been urgent calls from certain countries for China to accelerate the pace of the yuan's appreciation, arguing that the current rate is insufficient.

Such arguments often carry two underlying assumptions: first, that exchange rate movements are暗示为中国“可控的操作”, and second, that a stronger yuan directly equates to a tool for weakening Chinese exports. However, the reality is clearly different. Exchange rates reflect both market sentiment and underlying economic fundamentals. As the new year begins, it is crucial to understand what the yuan's rise into the "6-handle" truly signifies.

'The Market's Tone Towards China Has Shifted' To answer this, one can listen to the market's voice. Recently, many international institutions, when releasing their asset allocation advice for the new year, have shifted their discussion from "whether to allocate to yuan-denominated assets" to "which Chinese assets are worth holding." This change itself reveals a key logic behind the yuan's appreciation.

One contributing factor is the weakening US dollar. Since 2025, the US Dollar Index has seen significant declines across multiple periods, remaining in a relatively weak state compared to recent years. A primary reason is the Federal Reserve's consecutive interest rate cuts, which have diminished the interest rate advantage of dollar assets and lowered return expectations for the dollar, creating conditions for the yuan's relative strength. In 2025, the Fed cut rates three times by a total of 75 basis points.

Simultaneously, the expansion of the US fiscal deficit, rising debt levels, and persistently high trade policy uncertainty indices have eroded the foundation of dollar credibility. Even if the dollar experiences periodic rebounds, a sustained strong trend would require simultaneous improvements in fundamentals, interest rate differentials, and global confidence—conditions not yet fully met.

However, "dollar weakness" alone is insufficient to explain the timing of this yuan appreciation cycle. Observing the USD/CNY trend reveals a key turning point around April 9, 2025. Before this date, the yuan's movement was not pronounced, characterized by mixed gains and losses with high volatility. After April 9, the yuan abruptly reversed its previous weaker trend and began a sustained appreciation.

This timing highly coincides with the escalation of Sino-US trade friction. On April 10, China's countermeasures against US so-called "reciprocal tariffs" took effect, following the US raising tariffs on Chinese goods to 145%. Typically, escalated trade friction implies heightened uncertainty, often pressuring a currency. Yet, this time, the yuan's trajectory reversed, strengthening consistently.

According to Yang Changjiang, Director of the International Finance Research Center at Fudan University, one reason is a shift in external expectations regarding the Chinese economy. Early in 2025, due to US tariff threats, international markets held doubts about China's economic resilience, leading to weakened confidence that affected the yuan's performance for some time. However, as China demonstrated firmer countermeasures, especially by being the first nation to retaliate against the US tariffs in April, market expectations began shifting from concern towards trust.

In essence, while dollar weakness provided the external context, the change in market expectations post-April influenced the specific pace of the yuan's rise. Additionally, three practical factors are at play.

First, macro-policy deployment created a buffer. The 2024 Politburo meeting anticipated potential external shocks for 2025, advocating for "strengthened unconventional counter-cyclical adjustments" to prepare for various scenarios. Throughout 2025, China's economy demonstrated stable and progressive growth.

Second, the transmission of exchange rate effects has a lag; orders, contracts, and pricing are not immediately fully impacted by short-term rate changes. Furthermore, as China shifts from exporting final consumer goods to supplying intermediate products, exchange rate fluctuations are less likely to prompt order cancellations.

Third, industrial competitiveness is strengthening. Guided by policies such as those against "involution," profit margins in Chinese manufacturing are improving, industrial structure is optimizing, and enterprises' ability to withstand exchange rate volatility is enhancing.

The combination of these factors has led to more stable market judgments about the Chinese economy, providing support for the yuan's exchange rate.

'The Yuan is Evolving from a Transaction Currency to an Asset Currency' A distinctive aspect of this appreciation cycle is the growing overseas demand for the yuan, with its usage scenarios expanding. To understand this change, it's essential to examine the primary sources of international demand for the yuan, as outlined in China's financial strategy.

The Central Financial Work Conference in October 2023 explicitly stated the goal of accelerating the building of a financial powerhouse, which requires, among other elements, "a strong currency, widely used in international trade, investment, and foreign exchange markets, with global reserve currency status." This points to three sources of international demand for the yuan:

First, its use for payment and settlement in international trade and investment. Second, its role in market transactions and asset allocation. Third, its status as a global reserve currency for central banks.

The current appreciation also indicates increased use of the yuan in cross-border trade settlements. Official data shows approximately 30% of China's goods trade and over half of its cross-border transactions are settled in yuan, a significant increase from nearly zero 15 years ago. This change is particularly notable in emerging markets. Trade settlements with Belt and Road Initiative partner countries show a more pronounced increase in yuan usage. In 2024, the scale of yuan settlement with ASEAN and African regions grew by 21.8% and 35.9%, respectively.

Part of this yuan settlement is shifting from the SWIFT system, dominated by Western countries, to China's Cross-Border Interbank Payment System (CIPS). By 2025, CIPS had 193 direct participants and 1,573 indirect participants, covering 190 countries and regions globally.

Simultaneously, the infrastructure for yuan cross-border payments is accelerating. This includes enhancing the yuan's accessibility and usability overseas through a network of offshore clearing banks and swap agreements with global trade partners. China has signed currency swap agreements with over 40 countries and regions.

However, beyond trade settlement, a more noteworthy current change is the rising prominence of the yuan. On one hand, overseas investors are increasing their holdings of yuan-denominated assets. By the end of Q3 2025, foreign holdings of yuan assets reached 10.42 trillion yuan, a 43-month high. Overseas investors now hold Chinese stocks worth over 3.5 trillion yuan, making them significant participants in China's stock market.

On the other hand, more issuers are beginning to consider the yuan as a viable financing currency. In 2025, the issuer base for China's offshore financing tools, "dim sum bonds" and "panda bonds," expanded. Dim sum bonds are yuan-denominated bonds issued offshore, while panda bonds are yuan-denominated bonds issued within China by overseas entities. Market participants are increasingly using the yuan for financing through various means.

Although the overall scale of these markets has room for further growth, this evolution itself signals progress in the yuan's internationalization. While discussions about internationalizing the yuan previously focused largely on trade and investment, they now encompass a broader range of aspects.

A positive signal is the increase in the yuan's share as a foreign exchange reserve currency—the third source of international demand. A growing number of countries are considering including the yuan as part of their diversified reserve portfolios. Although the yuan's proportion in the global reserve system remains modest, change is underway. Central banks are optimizing their reserve structures, increasing holdings of gold and the yuan, essentially promoting reserve asset diversification.

The external environment is changing, with dollar credibility wavering, and currency statuses are shifting, with multi-currency alternatives potentially replacing the dollar's dominance.

Returning to the initial question: What does the yuan's rise into the "6-handle" signify? While future exchange rate fluctuations are possible, the current trend suggests the yuan is increasingly being viewed as a currency that can be traded, allocated, and used for financing. As this transformation deepens, challenges will undoubtedly arise. However, as evidenced, by strengthening internal fundamentals and maintaining economic resilience, obstacles can be overcome. In this sense, it can be said that the yuan is standing at a new starting point.