The end of the cheap yuan

On September 10th China's central bank set the yuan's daily reference rate at 6.7743 against the dollar, its strongest fixing since 2023. A single morning number of that kind reads as trivia. Tracked day after day, it is something bigger: the visible gauge of China quietly ending its long habit of keeping the yuan cheap.

The mechanism matters because Beijing rarely announces currency policy. Each business day the People's Bank of China posts a "fix", a central parity rate, and lets the onshore yuan trade within a band of 2% on either side of it. The fix is not the market rate; it is the government's anchor for it, and a ladder of firmer fixings is policy intent written one pip at a time. That ladder has been climbing for months. The fixing stood near 6.99 in late January, crossed the psychological 6.80 line in July for the first time since 2023, and has since pushed to 6.77. From January to today the yuan has appreciated roughly 3% against the dollar, delivered not in one dramatic revaluation but as a controlled, grinding drift.

Why would Beijing do this, after a decade in which the assumption was the opposite — that a weak yuan subsidised its exporters and its export-dependent economy? The answer is that the old policy has started to cost more than it protects. China's current-account surplus is projected to reach close to $700bn in 2025, and analysts put the true figure nearer $1trn once under-recorded flows are included. Export volumes are expected to grow 9-10% while import volumes are forecast to move barely at all. The IMF and foreign-exchange markets now read the yuan as significantly undervalued, by some 20% on one estimate. Keeping the currency cheap in that world invites the thing Beijing most wants to avoid: American and European claims of competitive devaluation, and the tariffs that follow.

The trouble is that letting the yuan strengthen has a known internal price. Chinese exporters earn dollars and book them in yuan, so each firmer fix erodes their margins; their dollar assets also shrink in home-currency terms. By August the squeeze had produced profit warnings, and Chinese policymakers had begun steadying the currency to slow the pace. That is the contradiction at the heart of the policy. The appreciation is real but contested, and the PBOC will intermittently put a hand on the throttle — which is why the yuan resembles a stop-start grind rather than a clean one-way bet.

There is a self-feeding risk on top. Chinese firms have hoarded dollars for years; a predictable appreciation encourages them to bring those dollars home, and the repatriation itself pushes the currency higher. To keep the pace gentle, Beijing has had to intervene in reverse, buying dollars as they flood in — more intervention, paradoxically, than a stable currency would require.

What should a spectator in America take from a currency movement smaller than a rounding error on most portfolios? Three things. First, learn to read the fix: a string of firmer fixings is a statement about intention, more legible than any PBOC communiqué, and the trend is worth watching for its own signal. Second, remember that the yuan's strength is in part a dollar story — the greenback was the worst-performing major currency of 2025, with the US Dollar Index falling roughly 9.4% — and a carry trade in which low Chinese rates, not high growth, attract the money. The dollar's direction still matters, and it is not obviously settled. Third, the currency redistributes the pain of the surplus across borders: it squeezes the margins of Chinese exporters and gives a slight lift to American firms that sell into China, whose yuan-denominated revenue converts into more dollars.

The deeper point is not that the yuan has become strong. It is that Beijing has accepted the tension of letting it rise — accepting, too, that competitive devaluation no longer pays when the surplus is so large that a cheap currency buys more retaliation than growth. A firm but heavily managed appreciation, interrupted whenever the domestic pain becomes too visible, looks like the path of least resistance. To a holder of anything priced in yuan, the daily fix is not trivia at all. It is the meter on which that policy is being run.