ORLANDO, Florida, Sept 3 (Reuters) - A notable trend

this year has been the often-counterintuitive market reactions

to U.S. President Donald Trump's efforts to upend many long-held

economic norms. One of the biggest surprises has been the

appreciation of China's yuan.

The consensus opinion at the start of the year was that

Beijing would counter Washington's punitive tariffs on Chinese

imports by depreciating the yuan against the dollar. This would

keep Chinese goods competitive, enabling the country's exporters

to compensate for any loss of U.S. business.

On top of that, a weaker exchange rate would, in theory,

help to reflate China's economy, pulling it out of the

deflationary funk it has been in since its property bubble began

to burst in 2021.

And, finally, a weaker yuan would be a poke in the eye to

Washington. A key pillar of the Trump administration's economic

agenda, articulated most artfully by adviser Stephen Miran and

Treasury Secretary Scott Bessent, is a weaker dollar.

But Beijing surprised everyone.

The yuan did slide to an 18-year low around 7.350 per dollar

during the chaos of Trump's April 2 'Liberation Day' tariffs.

And combined with low domestic inflation and even deflation in

recent years, the yuan's broad 'real' effective exchange rate

(REER) is the weakest in over a decade.

But since April, it has reversed course rapidly against the

dollar, trading last week at a 2025 high of 7.1260 per dollar.

Indeed, measured by the People's Bank of China's official

daily fixings or offshore market trading, the yuan just posted

its biggest monthly gain against the greenback in almost a year.

These big moves can partly be explained by strong capital

inflows. The Shanghai Composite equity index is at a 10-year

high, boosted by record net inflows from hedge funds in August.

And even though China's trade surplus with the U.S. may be

shrinking, its global surplus in the first seven months of the

year hit a new record.

That's a recipe for a stronger exchange rate.

GOOD FAITH

But with a currency as tightly controlled as the yuan,

market dynamics are not the whole story.

The appreciation appears to be a deliberate policy choice by

Beijing, potentially hinting at its broader strategy in

combating Trump's tariffs.

On a basic level, this doesn't make sense. Given the

deflationary pressures still weighing on the Chinese economy,

why do authorities appear to be actively pursuing a stronger

exchange rate?

But when viewed as a negotiating tactic, the logic starts to

become clear. The Trump administration has explicitly stated

that it wants a weaker dollar - not a 'weak dollar', mind you -

but a currency level that would make U.S. exports more

attractive. And Beijing can help deliver this, especially given

that China's currency acts as an anchor for other regional

exchange rates.

Thus, the yuan's appreciation against the dollar indicates

that - despite China's show of force this week - Beijing is

still willing to negotiate with Washington.

'ANTI-INVOLUTION'

China may also want a firmer exchange rate to help ease some

domestic concerns, namely sluggish consumption.

The economic data coming out of China will do little to

support consumer sentiment or domestic demand: the latest

headline manufacturing PMI data was soft, new orders are

declining, and construction has contracted at its fastest rate

since the pandemic.

President Xi Jinping is clearly taking this seriously. He

has pledged to take steps to boost domestic consumption and

technological innovation, while supporting small firms. And he

has also spoken about breaking the cycle of "involution", a term

now widely used for excess competition and overcapacity.

An appreciating yuan should help these efforts because, as

all else being equal, a stronger currency should boost domestic

demand.

The yuan's recent rise against the dollar is thus "a policy

push, not a market pull," as Goldman Sachs analysts neatly put

it.

And given the foreign and domestic concerns China currently

faces, investors should not be surprised if Beijing keeps

pushing the currency higher, at least until the latest U.S.-Sino

tariff truce expires in November. A stronger yuan may be one

olive branch Beijing is still willing to offer.

(The opinions expressed here are those of the author, a

columnist for Reuters)