The Yuan Falls Below 7 per Dollar: What Is China Really Trying to Achieve?

1. The Essence of the Hegemonic War: Not Technology, but Capital

Recent strength in the Chinese yuan has largely been interpreted by markets as an attempt to stimulate domestic demand and offset weakening exports. This interpretation is not wrong. China’s structurally weak consumption and export slowdown driven by U.S.–China tensions are undeniable realities.

However, this view stops one step too early. We must ask a more fundamental question:

“What does China need most right now to win the hegemonic contest with the United States?”

Both China and United States know the answer: liquidity.

Today’s hegemonic competition is being fought in industries such as AI, Big Tech, semiconductors, and energy infrastructure—sectors that consume capital on a massive scale. Profits from traditional export-oriented manufacturing are no longer sufficient to finance this race, nor can domestic consumption be expanded quickly enough to generate the necessary funding. Even the issuer of the world’s reserve currency is exploring stablecoins as a new liquidity channel. This alone reveals the truth: capital, not trade, is the true fuel of modern power competition.

2. Redefining the Exchange Rate: From Export Shield to Capital Signal

Seen from this perspective, the role of the exchange rate changes entirely.If exchange rates once functioned as tools to enhance export competitiveness, today they serve as signals designed to attract global capital.

From an investor’s standpoint, no matter how compelling a country’s industrial vision may be, capital will not settle where the currency is structurally depreciating. The risk of FX losses overwhelms any long-term narrative. A stable or strengthening currency, by contrast, sends a clear message: investment here will not be eroded by exchange-rate risk.

The upward stabilization of the yuan therefore functions as a powerful assurance—almost a financial guarantee—aimed at drawing global capital into China’s economic reservoir. This explains why Chinese authorities are willing to tolerate yuan appreciation despite the inevitable pressure it places on export competitiveness. The real objective lies not in exports, but in capital credibility.

3. China’s New Arithmetic: Asset Effects, Not Trickle-Down Growth

How, then, does this capital revive the Chinese economy?

China is entering the early stages of a balance-sheet recession. Property prices are falling, household wealth is shrinking, and wage growth remains subdued. In such an environment, simply injecting liquidity does not automatically revive consumption.

What China appears to be pursuing instead is a detour:

Capital inflows → asset-market recovery → wealth effect → consumption revival

Rather than relying on traditional trickle-down growth, China aims to restore household balance sheets through rising asset values—particularly equities—thereby enabling consumption to recover organically. In this framework, domestic demand is not the starting point of policy, but its end result. If asset markets can stabilize and rise while exports weaken, China buys time—time for structural reform and industrial upgrading.

But the implications go far beyond stabilization.

4. The Scenario the United States Fears Most

Looking further ahead, if global capital successfully flows into China and that capital is translated into genuine technological competitiveness in AI and Big Tech, the strategic picture changes dramatically.

As capital inflows strengthen asset markets, rising asset income fuels consumption. China would then possess both a powerful domestic market and the core technologies required for hegemonic competition.

At that point, China would no longer be an export-dependent economy. A large, resilient domestic demand base would support sustained technological development, making the economy far less vulnerable to external shocks. This would not merely mark a cyclical recovery, but the completion of a fundamental growth-model transition.

And this is precisely the scenario the United States fears most.

If China succeeds in binding capital markets, technological capability, and domestic consumption into a single reinforcing loop, U.S. financial and technological leverage inevitably weakens. Dependence on the dollar-based capital order declines, and economic sanctions lose much of their historical potency.

In this sense, yuan appreciation is not a short-term macro adjustment. It is a strategic weapon capable of structurally reducing U.S. influence. China understands this better than anyone—which is why it cannot easily abandon this path.

5. A Dangerous Balancing Act—and the Coming Liquidity Wave

Of course, this strategy cuts both ways. If the currency appreciates too rapidly, export firms may collapse before asset effects can materialize. This explains why Chinese authorities continually engage in verbal intervention: the direction of the currency is upward, but the speed must be tightly controlled.

What we are witnessing, ultimately, is the opening phase of a global liquidity war—a contest over who can retain global capital for longer. Should China succeed in transforming itself into a technology-driven economy anchored by domestic demand, it would represent the strategic nightmare Washington hopes to avoid.

For investors, the conclusion is clear. Both the United States and China are now locked into systems that require continuous liquidity provision and asset-price support to preserve stability. This strongly suggests that we may be approaching one of the largest capital super-cycles in modern history.

If liquidity truly surges, the question investors must ask is not whether opportunities will emerge, but where they will materialize first.

2026 may prove to be a year that delivers both the greatest opportunities—and the greatest risks—of this investment era.