Summary:Yuan rose 4.5% in 2025, its best year since 2020Former SAFE official says gains lack fundamental backingStrength driven by weaker dollar demand, not inflowsFalling REER does not imply undervaluationDisinflation and output gap argue against stronger yuanYuan’s rebound lacks fundamental backing despite 2025 gains, former FX regulator warns. Info via Reuters report. The Chinese yuan’s appreciation against the US dollar over the past year does not signal a broader revaluation of the currency or Chinese assets, and lacks support from underlying economic fundamentals, according to Guan Tao, a former senior official at China’s foreign-exchange regulator.The yuan rose about 4.5% against the dollar in 2025, snapping three consecutive years of decline and marking its strongest annual performance since 2020. The rebound has fuelled market speculation that the currency may be structurally undervalued and poised for further gains.However, Guan, now global chief economist at Bank of China International Securities and formerly with the State Administration of Foreign Exchange, cautioned against drawing such conclusions. Writing on his official WeChat account, Guan said claims of yuan undervaluation “lack support from data, facts or theory.”He argued that recent improvements in China’s foreign-exchange conditions have been driven mainly by weaker demand for US dollars rather than stronger confidence in converting foreign currency into yuan. In other words, reduced capital outflows — not rising inflows — have underpinned the currency’s gains.Some investors have pointed to China’s falling real effective exchange rate (REER) and its sizeable goods trade surplus as evidence that the yuan is undervalued. But Guan warned that REER depreciation does not automatically imply mispricing or an inevitable appreciation cycle. According to Bank for International Settlements, China’s REER has fallen nearly 17% since peaking in March 2022.Domestically, Guan said persistent disinflationary pressures argue against a stronger currency. China’s price levels remain subdued, nominal growth continues to lag real growth, and the economy is operating with a negative output gap — conditions that traditionally point to downward pressure on the exchange rate. Producer prices have been falling for more than three years, while full-year consumer inflation in 2025 was the weakest in 16 years, despite a late-year pickup.Guan also challenged the assumption that a stronger yuan would automatically attract foreign capital. While appreciation can lift returns on existing investments, it raises the entry cost for new inflows. Whether capital ultimately increases, he said, depends on the balance between these opposing forces. ---State Administration of Foreign Exchange (SAFE) is China’s foreign-exchange regulator, responsible for managing the country’s FX reserves, overseeing cross-border capital flows, and enforcing currency and balance-of-payments rules. This article was written by Eamonn Sheridan at investinglive.com.