(Yicai) March 5 -- The Chinese yuan has strengthened steadily against the US dollar since the start of the year. Even after stripping away temporary factors such as seasonal foreign exchange settlements and the recent thaw in China-US relations, the yuan still has the foundations and conditions to appreciate moderately over the next five years, supported by factors such as economic growth, the balance of payments, capital flows, monetary policy and a weaker greenback.

Over the next five years, the yuan is expected to appreciate moderately against the dollar while continuing to fluctuate based on market supply and demand. This year, the central parity rate of the dollar against the yuan may move between 6.6 to 7. The offshore yuan could fluctuate within a slightly large range, but overall the trend is likely to feature “two-way fluctuations with a modest strengthening.”

The “China Fast, US Slow” growth pattern, in which China’s economy expands faster than the US economy, will help lift the yuan’s underlying value. Despite challenges such as ongoing adjustments in the real estate sector, pressure from local government debt and a more complicated external environment, China’s economy has demonstrated strong resilience.

Over the next five years, factors including the shift toward higher-end, more intelligent and greener manufacturing, continued leadership in the digital economy, rising investment in technological innovation and the advantages of China’s huge domestic market are expected to keep gross domestic product growth above 4.5 percent and possibly close to 5 percent.

From 2010 to 2019, the US economy expanded at an average rate of 2.27 percent. Growth was 2.8 percent in 2024. Although investment in artificial intelligence and energy exports may support the US economy to some extent, factors such as tariff wars, massive government debt and the weakening dollar hegemony are likely to weigh on growth.

Over the next five years, excluding unusual events like pandemics or wars, US economic growth is unlikely to move far from its long-term average of 2 percent. Differences in economic growth are a fundamental factor affecting exchange rates. The medium-to-long-term pattern of ‘faster growth in China and slower growth in the US’ reflects the relative strength of the two economies, providing a solid foundation for a gradual rise in the yuan’s intrinsic value.

Inflation Gap

Differences in inflation between China and the US will also help support the redback. From 2026 to 2027, China is likely to remain in a phase of recovering from deflation risks and moving toward low inflation, as weak demand and overcapacity in some sectors continue to weigh on prices. During this period, consumer inflation is expected to hover between 0.5 percent and 2 percent. From 2028 to 2030, as excess capacity is gradually addressed through market-oriented mechanisms and the upgrading of traditional industries, the consumer price index, which is a key gauge of inflation, is expected to rise to between 2 percent and 2.5 percent.

In contrast, US inflation is likely to remain relatively high and volatile due to factors such as tariffs, sticky service-sector inflation, fiscal expansion and debt monetization. The US CPI is expected to be around 2.5 percent to 2.8 percent from 2026 to 2027, before gradually falling back to 2 percent and 2.3 percent after 2028, but this is still significantly higher than in China. From the perspective of purchasing power parity, this persistent inflation gap between the two countries could become an important factor for supporting yuan appreciation against the dollar.

China’s current account surplus will also push the yuan stronger at times. Since China’s goods trade surplus is far larger than its service trade deficit, the country has maintained a relatively high overall current account surplus in recent years. The quality of the workforce continues to improve, industrial robots and smart equipment are becoming more widely used, mid-to-high-end manufacturing is becoming the main driver of exports and new growth areas in services trade are also emerging. Meanwhile, China’s reliance on the US market has declined significantly while exports to Europe, Asia-Pacific and Latin America continue to grow quickly. As a result, China’s current account surplus is likely to remain solid for some time, providing key fundamental support for a stronger redback.

The earlier pressure on the yuan still needs to be corrected. From 2022 to 2024, the depreciation of the yuan’s central parity rate against the dollar exceeded the reasonable range supported by economic fundamentals. This was not a true reflection of economic fundamentals but rather an overreaction caused by external shocks combined with short-term market sentiment, which pushed the exchange rate away from its equilibrium level.

Since the second half of last year, US efforts to suppress China’s economy have clearly been frustrated, and Washington has begun to seek to improve bilateral relations. Expectations of yuan depreciation in international markets have also eased noticeably. As more foreign investors show interest in holding yuan-denominated financial assets, expectations for a moderate appreciation of the currency are likely to strengthen further.

Dollar Decline

Rapidly expanding government debt is weakening confidence in the dollar. By the end of last year, US federal government debt had exceeded USD38 trillion, a record high. The continued expansion of federal debt will not only squeeze the US government’s fiscal and public policy space but may also hurt the country’s sovereign credit rating, further weakening confidence in the dollar. Rough estimates suggest that every 10-percentage-point increase in the US debt-to-GDP ratio could lead to a decline of between 3 percent and 4 percent in the dollar index.

Policies under US president Donald Trump could further shake the dollar’s global position. In an effort to stimulate economic growth and ease debt pressure, Trump has repeatedly put pressure on the Federal Reserve and interfered with its decisions, posing serious challenges to the independence of US monetary policy. At the same time, the frequent use of tariffs, financial sanctions, and long-arm jurisdiction has eroded the dollar’s role as a global public good and damaged international trust in its neutrality and reliability, prompting more countries to reduce their holdings of dollar assets.

The global trend toward “de-dollarization” may further affect the dollar’s position. The decline in the dollar’s role has been most noticeable in cross-border payments. In January, the dollar’s share in global payments by value fell to 50.5 percent, according to statistics released by SWIFT. At the same time, several countries, including China, Saudi Arabia and Russia, have begun settling part of their oil trade in non-dollar currencies such as the yuan and the Indian Rupee. What started as experiments in a single sector has now evolved into a broader wave of”de-dollarization” across multiple fields, currencies and payment systems, which will continue to affect global demand for the greenback.

Controllable Risks

A moderate appreciation of the yuan is unlikely to significantly hurt exports. Since 2020, China’s foreign trade has shown stronger advantages across the entire industrial chain and clear signs of industrial upgrading, which has reduced the impact of exchange rate fluctuations. As the technological content and global competitiveness of China’s export goods continue to improve, and more companies actively use financial derivatives to hedge against currency risks, the degree to which exports are affected by exchange rates could weaken even further.

A moderate rise in the yuan is unlikely to trigger asset bubbles. Given China’s current situation, the chances of large-scale asset bubbles caused by yuan appreciation are relatively low. The real estate market is still undergoing a deep adjustment and is unlikely to return to an overheating phase anytime soon. Meanwhile, valuations of China’s stock market remain relatively low and offer a considerable safety margin, and the emergence of a systemic bubble less likely.

China’s huge foreign exchange reserves and steadily rising gold reserves provide strong backing for a stronger redback. The country’s foreign exchange reserves have maintained rapid growth for more than a decade, and have generally stayed above USD3 trillion, ranking first in the world and accounting for about 30 percent of the global foreign exchange reserves.

By the end of 2025, China’s official gold reserves had reached 74.15 million ounces, or approximately 2,306.32 tons. The growing gold stock, together with foreign exchange reserves, helps strengthen confidence in the yuan, enhance authorities’ ability to manage the currency and deal with risks, and boost market confidence.

An increasingly mature regulatory system will help support moderate yuan appreciation. China’s foreign exchange regulators have established a unified monitoring and analysis platform for cross-border capital flows, allowing comprehensive data collection, statistics, monitoring and analysis. Regulators can use tools such as cross-border financing leverage ratios, risk conversion factors and macro-prudential adjustment parameters to carry out counter-cyclical adjustment. They can also manage risks by requiring financial institutions to set aside foreign exchange risk reserves for forward forex sales or by adjusting banks’ overall foreign exchange positions for settlement and sales.

The authors are Liu Tao, senior researcher at the Guangkai Chief Industry Research Institute, and Lian Ping, president and chief economist of the Guangkai Chief Industry Research Institute and chairman of the China Chief Economists Forum.

Editor: Kim Taylor