"My heart was bleeding," lamented Gloria Yu, a bicycle exporter in China, after suffering losses from the yuan's rapid appreciation against the US dollar. The yuan appreciated so quickly that it cut into her margins between pricing and receipt of payment.
Over the past year, the yuan has appreciated by around 6-7%, an outlier among emerging market currencies. The move has been gradual, but persistent enough to start showing up in corporate earnings.
Pressure on Margins, Turn to Hedging
Many companies are reporting losses due to currency swings. That has changed how they manage their dollar revenue. They used to hold dollar balances. But now they want to convert them to yuan as soon as possible. For much of the past decade, exporters assumed that the yuan would depreciate. Therefore, holding dollar earnings became profitable without formal hedging.
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That logic has reversed. A stronger yuan reduces the value of the unconverted dollar balance. Many companies, therefore, are turning to formal hedging. A record 1,409 listed Chinese companies disclosed forex hedging in 2025, up 13.5% year-on-year.
Derivatives Markets Signal
Because US interest rates are higher than China's (3.65% vs. 3%), USD/CNY forward rates (1 year forward = 6.67) are trading lower than spot rates (6.83). This means exporters that hedge by selling dollars forward lock in a worse rate than what they can get today. This reduces the incentive to hedge far ahead and pushes firms toward earlier conversion.
Even so, derivatives markets show that firms have adjusted to the change in currency dynamics. Earlier, firms were short yuan and long dollars. They used options that paid off if the dollar rose, protecting against yuan depreciation. That has shifted. Firms are now hedging against further yuan appreciation.
They are effectively long yuan and short dollars. This is reflected in the net-delta exposure of outstanding FX options, a line item in China's official statistics. It remained negative for several years but has turned positive over the past three months.
Policy changes have reinforced this shift. The People's Bank of China has removed the 20% reserve requirement on forward FX sales, lowering the cost of hedging against yuan strength. While forwards remain structurally unattractive due to rate differentials, policy has made it easier for firms to hedge, particularly against further appreciation.
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Surplus is Shrinking
The impact of these shifts is visible in the banking system's foreign exchange flows. When exporters convert dollars into yuan, they sell foreign exchange to banks. When firms import, invest abroad, or hedge, they buy dollars back. The difference between the two shows how much of the inflow remains in the system. The positive value shows that firms are net sellers and vice versa.
Through early 2025, firms were net buyers of dollars. That pattern was reversed by mid-2025. By December, it had widened sharply to over $100 billion, reflecting a period where exporters were converting more of their dollar earnings rather than holding them. The shift coincided with a strengthening yuan.
China's net forex inflows via banking system
Photo Credit: Chart by Swapnil Karkare
This trend carried into early 2026, but the magnitude of that surplus fell to $16 billion in March. It reflects a rise in dollar demand within the system. Corporations and households are using them for imports, investment and hedging.
Over 2025, yuan appreciation pushed firms toward faster conversion, turning the system from net dollar buyers to net sellers. In recent months, that same process has begun to stabilise as demand for foreign exchange rises alongside supply, reducing the net surplus.
Final Take
The Chinese economy continues to generate a current-account surplus. But that surplus no longer sits idle in the system. Firms are converting it, hedging it, and putting it to use. Chinese companies still sell more dollars than they buy, but the gap has narrowed sharply. This does not look like broad dollar dumping. It looks like a response to a stronger yuan. Reading this as a structural shift away from the dollar would be a stretch.
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