The debate over whether the Chinese yuan has entered a new appreciation cycle requires a measured approach. Currently, factors influencing the yuan's rise and fall coexist, with short-term positives slightly outweighing negatives, yet the macroeconomic tightening effects of appreciation could unsettle market sentiment. Over a longer horizon, uncertainties and instabilities affecting exchange rate movements remain prevalent, making unpredictable swings the norm. It is prudent to be cautious with the grand narrative that yuan appreciation will drive a revaluation of Chinese assets, as currency fluctuations carry both benefits and drawbacks that should not be overly judged in value terms.

Since early 2026, the dollar index has turned from a 9.4% decline in the prior year to an overall rise, with heightened Fed tightening expectations widening the negative interest rate gap between China and the U.S. Despite this, the yuan has charted an independent course of a stronger currency against a robust dollar. In the first eight months, the onshore yuan spot rate and the CFETS yuan index each appreciated by 4%, echoing the pattern seen in 2021 when the dollar index swung from a 6.7% drop to a 6.7% gain, and the yuan strengthened 2.6% and 8.0% respectively, defying conventional dynamics.

Drawing parallels to the adage in stock markets that three bullish candlesticks shift expectations, the yuan faced a persistent depreciation pressure from March 2022 to April 2025. However, since turning to a fluctuating appreciation in April 2025, market sentiment has become predominantly bullish, with some arguing the yuan has entered a new appreciation cycle, and others using purchasing power parity theory to assert that yuan appreciation is inevitable. This scenario mirrors the period from June to December 2020, when the yuan appreciated 9.3% in seven months, prompting widespread predictions of a new cycle with long-term appreciation, and forecasts of the rate breaking past 6 to reach 5 in 2021. In hindsight, the yuan stalled around 6.37 by the end of 2021, far from the 6 threshold, and the appreciation that began in May 2020 ended in March 2022, lasting only 21 months with a maximum gain of 13.5%. Historical data suggests that currency cycles typically span longer durations, such as the complete appreciation cycle from 1994 to 2014, followed by a depreciation-heavy phase after the 2015 exchange rate reform. Defining a new cycle based on a mere 21 months of appreciation would render the cycle's span too short and cumulative gains too modest to be meaningful.

Three short-term positives underpin the yuan's resilient strength. Firstly, external demand has been notably stronger, with the goods trade surplus reaching a record $687.2 billion in the first seven months of 2026, 2.33 times that of the same period in 2021. While a trade surplus does not automatically lead to yuan appreciation, China's forex market is dominated by goods trade, so an appreciating environment can prompt the surplus and appreciation expectations to reinforce each other in a self-fulfilling manner. Secondly, Sino-U.S. economic tensions have eased, as seen in the establishment of trade consultation mechanisms in May 2025, a one-year tariff truce agreement in October, and President Trump's visit in May 2026 to solidify a constructive stable relationship, which has helped restore bilateral trade flows, with exports to and imports from the U.S. growing 21.0% and 20.6% year-on-year respectively from May to July 2026. Thirdly, the macro narrative has improved markedly, shifting from persistent discussions of old problems like property-sector woes, local government debt, and deflation to a focus on price recovery, technological innovation, and new consumption trends, which has boosted market confidence at the margin and lent support to the yuan on a sentiment level.

However, five major uncertainties warrant attention. The first is the lingering pain of economic transition. A key indicator of China's successful shift from old to new growth drivers is the move from export and manufacturing-led expansion to consumption and service-led growth. Given that new drivers are not yet offsetting the decline of old ones, the economy is still navigating transitional challenges. Foreign investment data reveals that during the previous yuan appreciation from Q3 2020 to Q1 2022, quarterly average foreign investment, measured by non-reserve capital and financial account liabilities, stood at $158.5 billion. In contrast, during the current appreciation from Q2 2025 to Q1 2026, this figure averaged only $5.2 billion, undermining assertions that foreign allocation to Chinese assets has shifted from optional to obligatory.

Secondly, external environmental impacts are deepening. The 15th Five-Year Plan's assessment of the development landscape has shifted from emphasizing important strategic opportunities to highlighting a period with more uncertainties and difficult-to-predict factors, signaling a more complex and severe external environment. While the current stabilization of Sino-U.S. trade relations is a positive, adverse changes cannot be ruled out. The IMF's July 2026 World Economic Outlook flagged multiple severe risks, including renewed Middle East geopolitical tensions, accelerated trade fragmentation, tech bubble bursts, and high public debt, any of which could derail global growth and test China's resilience.

Thirdly, the outlook for U.S. dollar interest rates and exchange rates presents a challenge. Unlike the previous appreciation cycle that coincided with positive interest rate differentials, this yuan appreciation has occurred alongside a widening negative gap, prompting foreign investors to reduce holdings of onshore yuan bonds since Q2 2025. If U.S. inflation risks escalate and Fed rate hike expectations strengthen, the negative spread could persist or widen. Additionally, geopolitical conflicts might drive safe-haven demand and Fed tightening sentiments, potentially supporting the dollar. This divergence from conventional expectations warrants close monitoring of non-linear impacts from policy and geopolitical risks.

Fourthly, the validity of purchasing power parity as a predictor is questionable. A common argument for inevitable yuan appreciation is that the exchange rate is below PPP, but this is just one of many exchange rate determination theories, and convergence may not occur quickly. For instance, the yen has been undervalued by over 30% relative to PPP since 2023, and Asian currencies like the Singapore dollar, Korean won, and new Taiwan dollar have been persistently undervalued by 40% to 60% for three decades. The yuan narrative has similarly oscillated between appreciation inevitability based on PPP and depreciation inevitability due to monetary expansion. Even if convergence were to occur, PPP might not point to appreciation, as China's PPP has fluctuated from 1.7 in the early reform period to a low of 4.1 and back to 3.4, and as a growing economy, China's inflation should structurally be higher than mature economies. Moreover, low education and medical costs in China suggest PPP is not an appropriate benchmark for assessing the yuan's long-term trajectory.

Fifthly, the macroeconomic contraction effect of appreciation deserves attention. Since 2025, China's private sector has shifted from net external liabilities to net claims, meaning that beyond trade channels, yuan appreciation could negatively impact corporate financial positions through financial channels. Data on A-share non-financial listed companies' exchange gains and losses from 2015 to 2025 show that appreciation years typically result in net exchange losses, while depreciation years yield net gains. Given the supportive stance of fiscal and monetary policies, an excessively rapid yuan appreciation would contravene the consistency of macroeconomic policy. This also refutes the notion that yuan appreciation benefits stocks and depreciation harms them; in reality, currency and equity markets are driven by different factors. For example, after the Middle East war in early 2026, China's relative advantage in withstanding energy crises drove the yuan to appreciate independently, but global stock markets, including A-shares, adjusted due to retreating monetary easing expectations and risk aversion. Globally, the lack of a necessary link between currency and stock markets is not unique to China, as seen with the dollar index falling 9.4% in 2025 while U.S. indices hit record highs, and the Indian rupee's eight-year slide coinciding with an eight-year bull run in Indian stocks. Even when yuan and A-share movements align, correlation does not imply causation, making the logic of predicting Chinese asset revaluation based on yuan appreciation expectations debatable.

In conclusion, factors affecting the yuan's rise and fall coexist, with short-term positives having an edge, but the tightening effects of appreciation could disturb sentiment. Over the long run, uncertainties and instabilities remain abundant, making accurate exchange rate predictions impossible and two-way fluctuations the norm. Both in China and abroad, stock and currency markets respond to distinct drivers, and co-movements reflect correlation rather than causation. Therefore, the grand narrative of yuan appreciation driving Chinese asset revaluation should be approached with caution, as currency fluctuations entail both advantages and disadvantages that should not be over-judged. The risks include uncertainties in geopolitical situations and monetary policies of major economies.