China's Yuan Hits 3-Year High as Energy Structure Offers Shelter

China’s yuan has strengthened to a near three-year high since March, with the offshore yuan (CNH) breaking the 6.81 per dollar level even as geopolitical tensions fueled a broad rally in the US dollar.

"The resilience stems from China's favorable energy structure and a continuing wave of foreign exchange settlements by exporters," according to a report from Zhaowei Macro Research. "This is only the second time since the 2015 currency reform that the yuan has strengthened in lockstep with the dollar."

Since March, the CFETS RMB Index, a trade-weighted basket, has seen its appreciation accelerate, gaining 1.7 percent. The yuan has also risen against the currencies of most of its trading partners, bucking the trend seen in other Asian economies like South Korea and Thailand, whose currencies have weakened more than 2 percent against the dollar.

The yuan's strength challenges the dollar's traditional haven status during crises and suggests that global capital may increasingly view Chinese assets as a viable alternative for diversification, a trend that could be accelerated by the weaponization of financial sanctions and a push for alternatives to the petrodollar system.

Favorable Fundamentals and Capital Flows

The yuan's divergence from other currencies is supported by two primary factors: resilient economic fundamentals and persistent capital inflows. China's economy, which bottomed out in the third quarter of 2025, is now on a recovery path. This recovery is buttressed by an energy structure that is far less vulnerable to oil price shocks than other nations. China’s dependency on oil and gas stands at just 27.5 percent, significantly below the global average of 55.5 percent. Furthermore, its crude import sourcing is diversified, with only 24.7 percent of imports transiting the vulnerable Strait of Hormuz.

On the capital front, a "tide of settlements" by exporters continues to provide strong support for the currency. Banks recorded a net foreign exchange settlement surplus of $55.2 billion in February. High-frequency data on currency trading volumes suggests this trend continued through March. At the same time, while global risk aversion prompted capital to flee US and European equity markets, outflows from Chinese markets have been comparatively mild.

Geopolitics May Reinforce Long-Term Strength

The current geopolitical landscape may reinforce the long-term logic for a stronger yuan. Heightened concerns over energy security are expected to accelerate the global transition to renewables. This plays to China's strengths, as it holds dominant export market shares in key green technologies, including 57.3 percent of batteries and 71.5 percent of solar modules. Increased exports in these sectors would further bolster the yuan.

Moreover, the use of financial sanctions is prompting countries to reconsider the safety of the dollar-denominated settlement system. This is creating an opening for the yuan to play a larger role in global trade, particularly in energy. The share of China's cross-border transactions settled in its own currency has already risen to 35 percent, and the People's Bank of China has established 4.5 trillion yuan in currency swap agreements with partners including major oil exporters like Saudi Arabia and the UAE. This infrastructure could facilitate a gradual erosion of the petrodollar's dominance.

Finally, global asset allocators, particularly sovereign wealth funds, may be driven to increase their allocation to Chinese assets. A 2025 survey already indicated rising interest, and the current environment, which highlights the risks of over-concentration in US and European assets, is likely to speed up this diversification.

This article is for informational purposes only and does not constitute investment advice.