Editor's note: Last week, the Central Political Bureau meeting and the Central Economic Work Conference were held one after another, setting the tone for economic work in 2026. Over the past year, many fields have seen fruitful results, and the capital market has performed far beyond expectations. In the coming weeks, we will take you through a review of 2025 and a look-ahead to 2026.
【Anchor】Hello everyone, welcome to DDN Business Insider. I am Yunfei Zhang. Last week, the Central Political Bureau meeting and the Central Economic Work Conference were held one after another, setting the tone for economic work in 2026. Over the past year, many fields have seen fruitful results, and the capital market has performed far beyond expectations. In the coming weeks, we will take you through a review of 2025 and a look-ahead to 2026. The guests of this episode are Jing Chuan, independent economist and visiting professor at Xi'an Jiaotong University, and Yang Delong, chief economist of the First Seafront Fund.
Hello, everyone. Since December, the exchange rate of the yuan against the dollar has continued to strengthen, and discussions surrounding whether the yuan will "break 7" have intensified. In fact, the current exchange rate trend has exceeded the expectations set by many institutions and professionals at the beginning of the year.
Some viewpoints suggest that the prior strength of the yuan was closely linked to market expectations for Federal Reserve interest rate cuts. Now that the Federal Reserve's rate cuts have officially occurred, I would like to first ask Professor Jing what kind of fluctuations we can expect for the yuan's exchange rate going forward.
【Jing】The yuan is likely to continue strengthening or may experience a peak followed by a pullback. The main factors to consider are two key lines: one is whether the dollar index enters a sustained downward channel; the second is whether domestic economic recovery occurs faster than expected and whether the stability mechanisms of the People's Bank of China can continue to function effectively. Currently, the mainstream market judgment is that narrowing interest-rate differentials with the dollar, limited fiscal expansion, and sentiments around de-dollarization will likely keep the dollar in a weak fluctuation trend, although the speed of decline won't be too fast. The effects of domestic policy support are gradually becoming evident, making it more likely for the yuan to experience a corrective bounce with two-way fluctuations rather than a one-sided surge. Therefore, the exchange rate is likely to be strong in the short term, with a gradual upward trend, but affected by various factors like a dollar rebound and reduced cross-border currency settlement, resulting in a fluctuating upward trend.
【Anchor】Okay, Professor Jing, what other factors do you think could provide strong support for the yuan exchange rate?
【Jing】Currently, there are four important factors supporting the yuan. First, the economy shows structural resilience. While traditional sectors are weakening, high-tech manufacturing and equipment manufacturing remain in a high prosperity range. Overall, GDP in the third quarter is still above 5%. Organizations like the OECD and Goldman Sachs have consecutively raised their growth forecasts for China from 2025 to 2026, which somewhat weakens the subjective expectation that devaluation would boost exports.
Second, there is a seasonal surge in demand from export enterprises aiming to secure profits. Starting from October, the surplus in bank foreign exchange settlements reached $80.9 billion, well above last year's corresponding deficit, directly increasing demand for the yuan.
Third, the attractiveness of yuan-denominated assets has been enhanced to some extent. The rebounds in A-shares and Hong Kong stocks, along with bond yields higher than those in Europe and the U.S., have established a foundation for attracting foreign investment into yuan assets. Since July, net inflows from the Shanghai and Shenzhen Stock Connect have increased by $80 billion, and the scale of foreign-held bonds has also risen to $320 million, resulting in continuous capital inflows.
Fourth, the policy arsenal remains ample. The central bank has ample foreign exchange reserves, foreign exchange risk reserve requirements, and counter-cyclical tools that can be deployed at any time. These mechanisms are expected to continue to play a role in stabilizing unilateral expectations.
【Anchor】Aside from interest rate cuts, Mr. Yang, what other key factors do you think can help keep the yuan stable or continue to strengthen?
【Yang】The Central Political Bureau meeting and other important high-level meetings have greatly enhanced various investors' confidence in the trajectory of the Chinese economy in 2026. The strengthening economic outlook provides strong support for the yuan's exchange rate. China has achieved breakthroughs in technological innovation, both in hardware and large models, which has enhanced foreign confidence in Chinese assets. Recently, there has been ongoing foreign inflow into A-shares, Hong Kong stocks, and other Chinese assets, which has also increased the demand forconverting other currencies into yuan (FX selling). In the near term, the yuan exchange rate is likely to continue to oscillate and strengthen.
【Anchor】Currently, the market is most concerned about whether the yuan against the dollar can"break 7."Considering the current market environment and exchange rate trends, Professor Jing, do you think the probability of breaking 7 in the short term is high?
【Jing】In the short term, that is, from the end of this year to January next year, it is indeed possible to see intraday or even closing prices"break 7"due to the dual effects of a weakening dollar and peak currency settlements. However, whether it can stay below 7 remains uncertain. If the dollar rebounds or domestic data comes in below expectations, the exchange rate could easily bounce back to the range of 7.05 to 7.1.
Institutions generally project that the timeline for the yuan to "break 7"will be in the second half of 2026, based on the following core logic. First, the dollar is currently in a downward phase of the financial cycle, with the dollar index's central tendency continuing to decline—a high-probability event. This, to some extent, supports the appreciation of the yuan against the dollar.
Second, if domestic measures include increased fiscal spending and stabilization in the real estate sector, the endogenous momentum of the economy is expected to recover, potentially continuing to tilt the actual interest rate differential between China and the U.S. in favor of the yuan.
Third, as the internationalization of the yuan and its share as a reserve currency continue to increase, there will inevitably be a long-term demand for this type of allocation. By that time, "breaking 7"will no longer be a sudden impulse or shock but may become a new central point of volatility. Of course, if a rebound in U.S. inflation leads to the Federal Reserve restarting interest rate hikes, or if new global safehaven demands emerge, the dollar will strengthen again, postponing this timeline.
【Anchor】Regarding the discussion of whether the yuan exchange rate will "break 7" in the short term, Mr. Yang, considering various influencing factors, what do you think the likelihood is?
【Yang】Currently, the possibility is increasing. It could happen as early as the first half of 2026, but at the latest, it will "break 7" by the second half of 2026. Confidence in yuan assets is growing stronger, leading to increasing demand for capital inflows into A-shares and Hong Kong stocks. There is also expected to be greater demand for Chinese bonds. Additionally, the Chinese economy is projected to show some recovery in 2026. As various policies gradually take effect, this will boost economic data and significantly support the yuan's exchange rate.
【Anchor】The market is particularly focused on whether the yuan will"break 7."Professor Jing, what do you think is the core reason behind the market's emphasis on the"7"exchange rate level?
【Jing】The reason"breaking 7"has become the focus of public discourse is twofold. On one hand, 7 has appeared multiple times as a so-called policy defense line after the exchange rate reform, notably around 2015 and 2016, which is well-recognized by everyone. The market has come to regard this as a measure of regulatory tolerance for exchange rate flexibility, affecting overall market psychology. On the other hand, breaking through 7 can easily trigger speculative short-selling of the dollar, prompting companies to delay currency exchanges, which amplifies this volatility. Thus, whether among regulators, enterprises, or foreign investors, 7 is viewed as a marker of policy direction and a potential risk for shifts in exchange rate expectations.
【Anchor】Yes, Mr. Yang, why do you think the question of whether the yuan-to-dollar exchange rate will "break 7" has garnered widespread attention in the market? What are the key factors behind this?
【Yang】The yuan exchange rate not only impacts global capital flows but also affects import and export trade. On one hand, the appreciation of the yuan boosts global capital confidence in Chinese assets, driving valuation recovery of these assets and attracting more foreign investment. On the other hand, it stimulates China's imports. Increased imports from China can drive global demand for goods, which is beneficial for global economic recovery. However, a certain degree of appreciation of the yuan may create pressure on export enterprises. Under the current complex international environment, export companies must enhance the competitiveness of their products, increase the added value of export goods, and minimize the impacts of exchange rate fluctuations.
【Anchor】It's worth noting that as the yuan continues to strengthen, several international institutions have raised their forecasts for China's GDP growth. Professor Jing, how do you view the relationship between the two?
【Jing】The continued strength of the yuan and the macroeconomic recovery are mutually reinforcing. First, the stabilization of enterprises leads to an increase in foreign capital allocation to yuan assets, driving capital inflows and boosting the exchange rate. Additionally, a stable and rising exchange rate naturally reduces import costs and stabilizes capital confidence. This, in turn, benefits consumption and investment. Improvement in exchange rate expectations can prompt enterprises to settle currencies ahead of time, leading to ample liquidity in banks' foreign exchange, thereby opening up policy space. This is precisely why, in recent times, when international institutions raised their forecasts for Chinese GDP, they also concurrently adjusted the valuation of the yuan's equilibrium exchange rate.
【Anchor】Yes, given the performance of the yuan and the adjustments by international institutions to domestic GDP growth forecasts, Professor Jing, do you think this indicates that the macroeconomic outlook for next year is promising?
【Jing】In this scenario, with proactive fiscal measures, special bonds, and policy tools working together, the results from infrastructure projects and the sustained high prosperity of high-end manufacturing and equipment manufacturing sectors, along with expectations of a narrowing decline in real estate sales and improvements in income expectations, will all influence institutions' forecasts for China's economy in 2026. Although export shares are affected by high tariffs, we can still see significant effects from supply chain restructuring. If policies are coordinated effectively, the GDP growth rate for 2026 could be around 5%. Furthermore, as the exchange rate serves as a nominal anchor, providing a benchmark for economic fundamentals, the combination of a weak dollar and a stable China is likely to maintain an overall strong trend with bidirectional fluctuations. This will help ensure certain growth prospects for next year's macroeconomic environment and capital market, avoiding excessive pessimism. However, caution is needed regarding geopolitical tensions, U.S. tariffs, and potential underperformance in real estate recovery. Overall, expectations for China's economy in 2026 are still higher than before.
【Anchor】From the current trends of the yuan and institutions' upward revisions of GDP growth forecasts, Mr. Yang, do you think this signals a good macroeconomic performance for next year?
【Yang】The stronger the Chinese economy grows, the stronger the support it provides for the yuan exchange rate. An appreciating yuan attracts more foreign capital inflows, creating a positive feedback loop. This also suggests that major international investment banks and organizations have positive expectations for our macroeconomic performance next year. This year, our macroeconomic growth rate is 5%, and for 2026, our growth target should also be around 5%. This allows us to maintain the highest growth rate among major economies, contributing significantly to global economic growth.
【Anchor】OK, thank you both for your insights. That's all for this episode. Remember to follow us on YouTube or download our APP. I'm Yunfei Zhang, thanks for watching, and see you next time.
Anchor: Laura Cheung | Edited: Kelly Yang, Laura Cheung, Rachel Liu | Translate: Kato Ip | Proofread: Chris Liu
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