The recent strength of the yuan could lead to up to $300 billion in corporate dollar sales as businesses begin converting their dollar reserves into local currency. Data from July shows that demand for foreign exchange conversion is rising, and the yuan is approaching levels where this might happen. Lu Zhe from Dongwu Securities forecasts that $300 billion could be converted if the yuan reaches about 7.04–7.05 per dollar. Similarly, Lemon Zhang from Barclays estimates that $240 billion could be sold if it hits 7.08–7.10. Currently, Chinese companies hold around $700 billion in dollars.

People’s Bank of China Strategy

The People’s Bank of China is setting its daily fixing around 7.1 per dollar, which might suggest that they are willing to accept a stronger yuan for leverage in trade talks with the US. However, due to market uncertainty and tariff risks, firms are expected to enhance their hedging strategies. Some exporters worry that a stronger yuan could cut their profits from dollar assets. There’s a likelihood of up to $300 billion in corporate dollar conversions if the yuan strengthens beyond 7.10 against the dollar. This possible shift from many large Chinese companies holding dollar assets is likely to put downward pressure on the USD/CNY exchange rate. The market is watching these crucial psychological and technical thresholds closely. Supporting this trend, recent data shows that China’s trade surplus widened to $95 billion in August 2025, a five-month high. The USD/CNY spot rate has dropped from around 7.25 to 7.12 in the last month, and for ten consecutive sessions, the People’s Bank of China has signaled a stronger daily fixing. This suggests an openness to further appreciation of the yuan.

Market Volatility and Trader Strategy

For derivative traders, this situation indicates a rise in expected volatility in the upcoming weeks. Buying options, such as straddles or strangles on the USD/CNY, is a sensible strategy to prepare for a substantial price movement, regardless of the direction. Implied volatility on one-month options rose from 3.5% to 4.8% in early September 2025, reflecting this increasing uncertainty. Exporters are showing heightened demand for hedging because they are concerned that a stronger yuan will eat into their dollar profits. This is driving activity in forward contracts and the purchase of USD call/CNH put options to guard against further yuan appreciation. For those betting on the trend continuing, selling USD/CNY futures or buying CNH call options provides direct exposure. This marks a significant change from the sentiment in 2023 and 2024 when the yuan weakened past 7.30 per dollar amid worries about the property sector. Companies were hesitant to part with their dollars at that time, but the trend is now reversing. This historical context emphasizes the importance of the current strengthening cycle and the pressure to sell. Create your live VT Markets account and start trading now.

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