China has allowed the renminbi to strengthen in nominal terms against the USD, EUR and key North Asian currencies (JPY, KRW and TWD) year to date, including close to 11% versus the KRW. In mid-June, German Chancellor Friedrich Merz called for a new Plaza Accord to address the EU trade deficit with China and implied the currency was 30% undervalued, but the recent moves in spot rates complicate arguments centred on undervaluation. Weak inflation has restrained appreciation in the real effective exchange rate (REER), even as nominal gains have run ahead of earlier expectations that REER strength would come mainly via inflation differentials.<\/p>\n\n
Official trade data point to a tactical rationale: imports from Japan, South Korea and Taiwan have risen sharply, with semiconductor demand described as the main driver. Under the Harmonised System classification, imports in HS 85 from the three jurisdictions climbed to over CNY 300bn in May alone, representing a near 60% year-on-year increase. The report also refers to large NA-3 trade surpluses and recycling flows that support currency misalignments, while projecting that CNY strength versus NA-3 may fade as current pressures ease and could later reverse once China\u2019s domestic output challenges existing exporters.<\/p>\n\n
We believe the yuan’s strength, particularly against the yen and won, is a deliberate policy choice. This makes critical technology imports less expensive, a view supported by customs data from June 2026 showing semiconductor imports were up over 25% year-over-year. This trend likely has a few more weeks to run as stockpiling continues.<\/p>\n\n
For the near term, we favor trades that benefit from continued yuan outperformance against its North Asian peers. This could involve buying CNH call options against the JPY or KRW, betting on further appreciation. The CNH\/JPY cross, now trading above 22.5, still appears to have momentum as long as this import policy remains in place.<\/p>\n\n
However, we see this as a temporary arrangement that will unwind once domestic production needs are met. We are closely monitoring reports on China’s domestic chip manufacturing, as any breakthrough signaling self-sufficiency could trigger a rapid policy shift. This means the current period of strength is finite and traders must remain vigilant.<\/p>\n\n
To prepare for this eventual reversal, we are looking at buying longer-dated CNH put options against the yen. This offers a low-cost way to position for a significant weakening in the yuan when the import strategy concludes. History, such as the period following the 2015 policy shift, shows that Beijing can alter its currency priorities abruptly.<\/p>\n\n
The yuan\u2019s strength against the dollar and euro is also notable because it is not being driven by inflation. With June’s CPI data coming in at just 0.5%, the currency’s real effective exchange rate is appreciating significantly. This nominal strength serves to blunt any criticism from the U.S. or E.U. about currency undervaluation.<\/p>\n\n\n\n