Yuan’s rally lacks fundamental support despite 2025 gains, former SAFE regulator says

The yuan appreciated by 4.5% against the US dollar in 2025, marking its strongest year since 2020. However, Guan Tao, a former FX regulator, warns that this rebound lacks fundamental support. He argues that the yuan's strength is largely due to weaker demand for US dollars rather than increased inflows. Claims of the yuan being undervalued, supported by a declining real effective exchange rate (REER), are also critiqued. Guan emphasizes that declining REER does not necessarily indicate a mispricing that would lead to a revaluation cycle. Domestically, disinflationary pressures add to downward pressure on the currency, as economic conditions suggest an ongoing negative output gap. Guan also points out that a stronger yuan may not attract foreign capital as presumed, emphasizing the complex balance of investment dynamics.