Why the Chinese Yuan Is Surging While the South Korean Won Crashes

Strong exports and trade surplus momentum. Robust export activity and large current account surpluses have generated sustained dollar inflows into China, even as the trade surplus narrowed somewhat . Analysts at the Institute of International Finance noted that China’s record-high trade surplus made a strong case for CNY appreciation and that the propensity to settle trade in yuan has improved, supporting the exchange rate .

Declining U.S. interest rates and a weaker dollar. A softer dollar environment globally has been a tailwind for Asian currencies generally, but the yuan has captured a disproportionate share of inflows . The yuan appreciated 4.4% in 2025 and gained roughly another 2% in early 2026, approaching three-year peaks .

Capital inflows into Chinese assets. Foreign investment funds have flowed into Chinese capital markets at an accelerating pace. According to Bloomberg estimates cited by the Chosun Ilbo, foreign investment funds of 200 billion yuan (about 44.2 trillion won) flowed into China in April 2026 alone — the largest monthly inflow on record . Increased use of yuan settlements by export corporations worldwide has also supported demand for the currency .

What Drives the Won’s Crisis-Era Weakness

Retail investor "Wall Street mania." The single most cited factor driving won weakness is an unprecedented surge in South Korean retail investment in U.S. stocks, creating outsized demand for dollars. This structural capital outflow drains won liquidity even as Korea’s export sector booms. A Reuters investigation in February 2026 described Korea’s "Wall Street mania" as undermining the government’s fight for FX stability, forcing authorities to reconsider their strategies .

Political instability. The impeachment and ouster of President Yoon Suk Yeol, followed by martial law controversy and a parliamentary probe, created severe political uncertainty that spooked currency markets. The Brookings Institution documented that the Constitutional Court unanimously upheld the impeachment charge on April 4, 2025, triggering a 60-day timetable for special elections . The won has not recovered.

BOK rate cuts and a dovish stance. The Bank of Korea cut rates ahead of the Federal Reserve, narrowing the interest rate differential and putting additional depreciation pressure on the won. The U.S. Treasury Department itself noted in its January 2026 FX Report that the won’s weakness was "not aligned to fundamentals," pointing to the BOK’s policy rate cut in November 2024 alongside emerging domestic political unrest as key drivers .

Energy import costs. Korea’s heavy reliance on energy imports means relatively sustained dollar demand from that channel, unlike China, which is less exposed .

Policy Responses: Two Opposite Playbooks

South Korea has mounted an aggressive campaign of verbal and market intervention:

• The finance ministry and BOK issued joint statements in May and June 2026 warning they would "take decisive actions if necessary" to stabilize the won .
• On July 2, 2026, Korea’s vice finance chief said Seoul is "closely communicating with Japan and other key allies" on FX issues and warned that the won has become "significantly misaligned relative to economic fundamentals" .
• The government announced crackdowns on "excessive volatility" and "one-directional herding" after the won surged past 1,560 intraday .
• The BOK governor nominee vowed in April to "respond to excessive won weakness" .
• Finance Minister Koo Yun-cheol committed to "short-term market measures and flow management" as early as January 2026 . Some economists have even called for a gradual rate hike to stabilize the currency .

China has taken the opposite approach — managing the yuan’s appreciation rather than fighting weakness:

• The PBOC has been "carefully lifting" the daily midpoint to control the pace of yuan gains, not reverse them .
• Analysts noted the PBOC sent "mixed signals" in early July 2026, with slight tweaks to the fix that suggest it is comfortable with gradual yuan strength .
• In February 2026, the PBOC moved to curb the yuan’s rapid appreciation by eliminating the foreign exchange risk reserve ratio for forward sales, lowering it from 20% to 0% effective March 2, 2026 — a signal that Beijing is comfortable with a more flexible, and potentially weaker, yuan if needed .

Undervaluation Concerns and Structural Factors

Yuan undervaluation debate. China’s real effective exchange rate (REER) declined by 4.6% in the year to September 2025, meaning the yuan’s real purchasing power weakened even as its nominal rate rose. This kept Chinese export competitiveness intact and has fueled persistent U.S. Treasury scrutiny .

Won undervaluation by overshoot. Multiple official sources — the U.S. Treasury, Korea’s own finance ministry, and the BOK — have all stated that the won’s weakness has overshot economic fundamentals, implying the won is undervalued on a fundamental basis .

Cross-rate impact on trade. The CNY/KRW cross rate has soared roughly 18.6% year-on-year, making Chinese exports more expensive for Korean buyers and giving China a major competitive edge in third markets . This structural gap, if sustained, could reshape supply chains and trade flows across Northeast Asia.

Divergent policy frameworks. China still operates a tightly managed currency regime with capital controls, allowing it to buffer external shocks. South Korea runs a largely free-floating regime with heavy capital account openness, making it far more vulnerable to the retail investor dollar outflow phenomenon .

Asia is increasingly transitioning from a convergence story to a divergence story, as MUFG Research noted in its H2 2026 outlook: currency performance is being shaped by countries’ participation in the AI-led investment cycle, external competitiveness, and domestic policy fundamentals . The yuan-won split is the starkest example of this new reality.