The Chinese yuan surpasses 7 against the dollar for the first time since 2024

The yuan is on track for its best annual performance against the dollar in nearly five years. Market flows are leaning towards selling the dollar, while major Chinese banks are buying it heavily at 7.006. Goldman Sachs: The yuan is undervalued by about 25%.

The Chinese yuan rose above the psychologically important 7-per-dollar level for the first time since September 2024, amid bets that the People’s Bank of China (PBOC) will allow a gradual appreciation of the currency to boost market confidence.

The offshore yuan gained 0.2% to reach 6.9964 per dollar on Thursday. The move came after the PBOC strengthened its daily reference rate to its strongest level since September 2024.

The yuan is on track for its best annual performance against the dollar in nearly five years, supported by a weaker US currency, capital inflows from the Chinese stock market rally, and easing geopolitical tensions.

Beijing seeks to avoid currency volatility

In recent months, Beijing has been guiding the yuan’s appreciation gradually through the daily reference rate mechanism, aiming to allow the currency to appreciate in a controlled manner without triggering volatility in the foreign exchange market.

Wang Qing, senior macro economist at Golden Credit Rating, said the yuan was supported by a weaker dollar and seasonal foreign exchange repatriations by exporters. He added that a sustained appreciation of the yuan would help boost the attractiveness of China’s capital markets to foreign investors.

In onshore trading, the Chinese currency rose 0.1% to 7.0067 against the dollar on Thursday.

Flows were generally toward dollar selling, while major Chinese banks were seen buying dollars heavily at levels near 7.006, according to traders who asked not to be identified because they were not authorized to speak publicly.

Traders said liquidity in offshore markets was thin due to holiday effects. Hong Kong markets are closed on December 25 and 26 for a public holiday.

The yuan remains undervalued.

Despite its rise against the dollar, many believe the yuan remains undervalued on a trade-weighted basis, particularly given the entrenched deflationary pressures in China.

Goldman Sachs said the Chinese currency is undervalued by about 25% relative to China’s economic fundamentals.

Zhao Pengxing, chief strategist at Australia & New Zealand Banking Group, said the yuan is likely to remain strong within a range of 6.95 to 7 against the dollar during the first half of next year.