(Yicai) Jan. 28 -- The Chinese yuan strengthened against the US dollar at the end of last year, breaking through the key 1:7 level, driven by strong foreign trade and economic data as well as a weaker US dollar. This trend is likely to continue this year, but the magnitude of yuan appreciation is not expected to be significant.

The yuan’s recent gains have mainly been driven by three factors. First, China’s current account surplus is expected to have reached a historic high last year. Data from the General Administration of Customs and the State Administration of Foreign Exchange show that China’s goods trade surplus exceeded USD1 trillion for the first time in the first 11 months of last year, while the current account surplus for the first three quarters reached USD492.8 billion, up more than 100 percent from a year earlier. A larger current account surplus typically increases demand for the yuan, supporting its exchange rate.

Second, Chinese authorities have rolled out a range of measures to shore up economic growth. In the fourth quarter of last year, the central government allocated a CNY500 billion (USD72 billion) quota for local government debt to bolster local finances and expand investment. At the same time, the central bank issued CNY500 billion in new policy-based financial instruments to support major infrastructure projects. Against this backdrop, China’s manufacturing purchasing managers’ index rose to 50.1 in December, beating market expectations.

Third, the US Dollar Index has weakened continuously since November last year, partly due to softer US nonfarm payroll data, concerns over elevated valuations in US equity markets, and consecutive interest rate cuts by the Federal Reserve. In addition, a deterioration in the US dollar’s credit standing has added to depreciation pressures.

Looking ahead, the yuan may continue to appreciate against the US dollar in 2026, but the pace is likely to remain moderate. One key reason is that China’s labor productivity growth over the past decade has slowed markedly compared with the previous decade, no longer supporting a sustained appreciation of the yuan’s real exchange rate.

According to the Balassa-Samuelson Hypothesis, proposed by economists Bela Balassa and Paul Samuelson, rapid productivity gains in a country’s tradable sector, such as manufacturing, tend to lead to an appreciation of its real exchange rate through domestic wage transmission. This mechanism was evident after China joined the World Trade Organization. From 2005 to 2014, China’s labor productivity grew at an average annual rate of 9.5 percent, underpinning a sustained rise in the yuan’s real exchange rate. From 2015 to 2024, however, the growth rate slowed to 5.8 percent, suggesting that over the long term the yuan will more closely track underlying economic fundamentals.

Another consideration is that while domestic demand undergoes periodic adjustments, external demand remains a key driver of China’s economic growth. With international geopolitical tensions intensifying, China’s exports could face greater headwinds. In this context, maintaining the price competitiveness of export products is crucial, and excessive yuan appreciation would weigh on export performance.

Taken together, these factors suggest that the People’s Bank of China’s primary objective this year will remain to keep the yuan exchange rate basically stable at a reasonable and balanced level.

The author of this article, Shen Jianguang, is chief economist at JD.Com.

Editor: Dou Shicong, Emmi Laine