The Strategic Implications of Yuan Stability Amid Escalating U.S.-China Tensions

The Chinese yuan (RMB) has long been a focal point in the evolving dynamics of global finance, particularly as U.S.-China tensions reshape trade, investment, and monetary policy. In 2025, the yuan’s stability—bolstered by the People’s Bank of China’s (PBOC) nuanced interventions—has become a critical factor for investors navigating a multipolar financial order. This analysis explores how the yuan’s strategic positioning, both domestically and internationally, creates unique risks and opportunities amid escalating geopolitical and economic competition.

The PBOC’s Calculated Approach to Stability

The PBOC has mastered the art of indirect intervention, avoiding direct use of foreign exchange reserves while maintaining the yuan’s resilience. By setting a fixed central parity rate and coordinating state-owned banks to act as “floor buyers” of the currency during periods of depreciation pressure, the central bank has curbed volatility without overtly signaling market dominance [4]. For instance, in Q3 2025, the USD/CNY rate stabilized around 7.12–7.13, with the yuan strengthening 0.97% against the dollar over the past month amid Fed rate-cut expectations [1]. This approach reflects a broader strategy to balance short-term export competitiveness (via a weaker yuan) with long-term goals of establishing the yuan as a stable reserve currency [3].

However, the PBOC’s interventions are not without challenges. China’s real effective exchange rate has weakened by nearly 20% over three years, driven by trade surpluses, capital outflows, and deflationary pressures [4]. While this depreciation has boosted exports, it risks exacerbating U.S.-China trade tensions, as seen in 2025 when Trump-era tariffs pushed the yuan to a 2025 low of 7.1889 [5]. The PBOC’s delicate balancing act—managing corporate foreign exchange exposure while resisting external depreciation pressures—highlights the fragility of its strategy in a multipolar system [2].

Yuan Internationalization and the Multipolar Financial Order

China’s push to internationalize the yuan is accelerating as it seeks to reduce reliance on the U.S. dollar. The digital yuan, or e-CNY, is central to this effort, with the PBOC promoting its use in cross-border transactions and multilateral frameworks like BRICS [6]. By 2025, the yuan accounted for 8% of global payments, up from 4% in 2020, as countries diversified away from dollar-dominated systems [3]. This shift is driven by geopolitical concerns, particularly after U.S. sanctions on Russia exposed vulnerabilities in dollar-centric financial infrastructure [2].

Yet, the yuan’s path to global acceptance remains fraught. Despite China’s $3.2 trillion in foreign exchange reserves, most are denominated in dollars, creating a paradox: Beijing wants to reduce dollar dependency but cannot fully sever ties without destabilizing its export-driven economy [2]. The PBOC’s recent $100 billion addition to its foreign exchange reserves in late 2023 underscores this tension, as it seeks to stabilize the yuan while maintaining sufficient liquidity to counteract capital outflows [4].

U.S.-China Tensions and the Redefinition of Risk

The U.S.-China trade war has introduced new layers of complexity for investors. Reciprocal tariffs—145% on Chinese goods by the U.S. and 125% on American products by China—have disrupted supply chains and forced companies to diversify production [5]. For the yuan, this has meant periods of sharp volatility. In April 2025, Trump’s 34% tariffs on Chinese imports pushed the yuan to a 2025 low, prompting the PBOC to set a fixing rate 1.5% stronger than offshore levels to slow depreciation [5].

These tensions have also reshaped Chinese outbound investment (ODI). In 2024, ODI surged to RMB 1.16 trillion, with a 11.3% year-on-year increase, as firms pivoted to emerging markets in Southeast Asia, the Middle East, and Central Europe [1]. Hungary, Türkiye, and Morocco have become hubs for Chinese EV and semiconductor investments, reflecting a strategic shift to bypass Western regulatory barriers [5]. For investors, this diversification presents opportunities in high-growth sectors but also risks tied to geopolitical instability and local regulatory shifts.

Strategic Opportunities in a Multipolar System

The yuan’s stability and internationalization efforts create distinct opportunities for investors:
1. Currency Hedging: As the yuan’s weight in global reserves grows, investors can hedge against dollar volatility by allocating to yuan-denominated assets, particularly in sectors like green energy and technology [6].
2. Emerging Market Exposure: Chinese ODI into Southeast Asia and the Middle East offers access to high-growth economies, though careful due diligence is required to navigate political risks [1].
3. Digital Yuan Ecosystem: The e-CNY’s adoption in cross-border trade could reduce transaction costs and open new markets for fintech firms and global corporations [6].

However, these opportunities come with caveats. The yuan’s non-convertibility and China’s capital controls limit liquidity, while U.S. sanctions and trade restrictions could escalate, further destabilizing the currency [3]. Investors must also contend with China’s opaque economic data, such as the discrepancy between trade surplus figures and balance of payments reports [2].

Conclusion: Navigating the Yuan’s Dual Role

The yuan’s stability is both a product of and a response to the U.S.-China rivalry. While the PBOC’s interventions have shielded the currency from immediate collapse, the broader push for yuan internationalization remains a work in progress. For investors, the key lies in balancing exposure to the yuan’s potential—whether through digital innovation, emerging market partnerships, or diversified portfolios—with the risks of geopolitical escalation and systemic fragility. In a multipolar financial order, the yuan’s trajectory will be a defining factor in shaping the next era of global capital flows.

Source:
[1] China Outbound Direct Investment (ODI) Tracker: 2024-25 [https://www.china-briefing.com/news/china-outbound-direct-invest-odi-tracker-2024-25/]
[2] China's Dollar Dilemma [https://carnegieendowment.org/research/2024/10/chinas-dollar-dilemma?lang=en]
[3] Significant, but not Systemic: The Challenge of China's Efforts to Rival Western Financial Predominance [https://csds.vub.be/publication/significant-but-not-systemic-the-challenge-of-chinas-efforts-to-rival-western-financial-predominance/]
[4] China's New Currency Playbook [https://www.cfr.org/blog/chinas-new-currency-playbook]
[5] China Battles to Stabilise Yuan After Trump's Tariffs [https://discoveryalert.com.au/news/trumps-tariffs-impact-chinas-currency-2025/]
[6] Can the Digital Yuan reshape Global Finance? [https://www.linkedin.com/pulse/can-digital-yuan-reshape-global-finance-cfi-financial-group-y1ogf]