The Yuan's Breakout and Its Implications for Global Capital Flows

The Chinese yuan's performance in 2025 has marked a pivotal moment in its journey toward internationalization, with strategic appreciation policies and geopolitical shifts reshaping its role in global capital flows. Amid a volatile U.S.-China trade war and broader macroeconomic uncertainties, the People's Bank of China (PBOC) has navigated a delicate balancing act: managing depreciation pressures while reinforcing the yuan's credibility as a stable reserve and trade currency. This dual strategy has not only stabilized domestic financial markets but also catalyzed a reevaluation of the yuan's potential to diversify global investment portfolios and reduce reliance on the U.S. dollar.

Strategic Appreciation: A Calculated Path to Stability

The PBOC's approach to exchange rate management in 2025 has been characterized by a mix of caution and deliberate intervention. While the yuan briefly hit 7.34 per dollar in early 2025-the weakest level since September 2023-the central bank has signaled limited tolerance for sharp depreciation, intervening through midpoint fixings to anchor the currency. By setting midpoints stronger than market expectations, the PBOC has guided the USD/CNY rate downward to 7.08 by year-end, signaling controlled appreciation. This strategy aligns with broader goals of maintaining financial stability and avoiding retaliatory U.S. measures, as analysts note that intentional devaluation could exacerbate trade tensions and erode domestic confidence.

Simultaneously, the PBOC has diversified China's foreign exchange reserves through aggressive gold acquisitions. In November 2025 alone, the central bank added 30,000 troy ounces of gold, reflecting a systematic effort to hedge against geopolitical risks and reduce exposure to dollar-denominated assets. These actions underscore a dual mandate: strengthening the yuan's global image while enhancing the resilience of China's reserve portfolio through non-correlated assets.

Foreign Investment: A Mixed Picture Amid Structural Shifts

The yuan's appreciation has had nuanced effects on foreign direct investment (FDI) into China. While actual FDI inflows declined by 10.3% year-on-year in the first ten months of 2025, reaching RMB 621.93 billion (US$86.38 billion), the number of newly established foreign-invested enterprises (FIEs) rose by 14.7%. This divergence highlights a shift in investor behavior: foreign capital is increasingly favoring smaller, phased investments in high-tech and service sectors, which accounted for 30.9% and 71.6% of total FDI inflows, respectively.

The service sector's dominance in attracting foreign capital reflects China's transition from a manufacturing-driven economy to one emphasizing innovation and domestic consumption. However, structural challenges persist. China ranks 17th most restrictive in the OECD's FDI Regulatory Restrictiveness Index, with stringent capital controls and regulatory unpredictability deterring larger-scale investments. Geopolitical tensions, particularly with the U.S., have further complicated the investment climate, as firms navigate risks tied to trade policies and supply chain realignments.

Currency Diversification: Yuan's Growing Global Footprint

The yuan's role in global trade and reserves has expanded significantly in 2025, driven by geopolitical shifts and Beijing's proactive internationalization efforts. Cross-border yuan settlements reached 13 trillion yuan (US$1.85 trillion) in the first three quarters of the year, accounting for 39% of China's goods trade. This growth is partly attributable to a strategic pivot by Chinese exporters, who have doubled transactions settled in yuan amid U.S. dollar volatility.

In forex markets, the yuan's share rose to 8.5% in 2025, securing its position as the fifth most traded currency. However, its role in global foreign exchange reserves has slightly declined, with its share dropping to 2.1% by mid-2025. This discrepancy highlights the challenges of converting transactional usage into reserve adoption, a process that requires deeper market liquidity and institutional trust.

Implications for Global Capital Flows

The yuan's strategic appreciation and diversification efforts have significant implications for global capital flows. A stable and mildly appreciating yuan enhances the investment case for Chinese equities and bonds, as foreign investors benefit from favorable currency conversion rates. Additionally, the PBOC's gold strategy and reserve diversification efforts signal a broader trend: emerging markets are increasingly seeking to reduce dollar dependency.

For investors, the yuan's breakout presents both opportunities and risks. On one hand, its growing adoption in trade and forex markets offers a hedge against dollar volatility and access to China's innovation-driven sectors. On the other, regulatory uncertainties and capital controls remain barriers to seamless integration into global portfolios.

Conclusion

The yuan's 2025 trajectory underscores its evolving role as a strategic asset in a multipolar financial landscape. While the PBOC's managed appreciation and gold acquisitions have bolstered the currency's credibility, the path to full internationalization remains complex. For global investors, the yuan's breakout is not merely a reflection of China's economic resilience but a harbinger of a broader realignment in capital flows-one where currency diversification and geopolitical pragmatism take center stage.