Lunar New Year: China's reopening lifts the yuan

The Lunar New Year celebration coincided with a dramatic financial renaissance for the Chinese currency. Having flirted with 7.35 against the US dollar in late October, the onshore and offshore yuan staged a relentless rally back toward 6.78, recording one of the fastest percentage recoveries on record. The catalyst was Beijing’s abrupt dismantling of zero-Covid protocols, which unleashed a torrent of foreign capital chasing beaten-down Chinese equities and sovereign assets. Yet treating the yuan’s resurgence as an unhedged bet on Chinese economic supremacy ignores the structural capital-account dynamics that will accompany the reopening of China's borders.

The initial burst of currency strength is driven by a powerful unwind of foreign-exchange hedges and corporate dollar hoards. Chinese exporters, having accumulated hundreds of billions in dollar deposits during the trade boom of 2021–2022, rushed to convert foreign currency into yuan ahead of the holiday.

The Reopening Outflow Wave

Simultaneously, global institutional funds executed an aggressive cyclical rotation out of crowded Western equities and into Chinese internet and consumer platforms, creating an immediate physical bid for yuan.

However, this inbound financial flow will soon encounter a formidable domestic counter-current. The reopening of international borders triggers an immediate revival of outbound tourism, which historically drained $250 billion annually from China’s services account.

Capital Account Pressures

Furthermore, domestic high-net-worth individuals and corporate entities, shaken by years of regulatory crackdowns and property sector turmoil, are eager to utilize international travel to diversify wealth offshore.

This structural services deficit and private capital leakage will steadily erode the merchandise trade surplus that supported the currency throughout the pandemic. The Lunar New Year surge in the yuan reflects an enthusiastic initial re-rating of Chinese assets, but the structural resurgence of outbound travel and private capital flight will soon reassert a ceiling on currency appreciation.