Source code character set processing in C and related languages is rather complicated. The C standard discusses two character sets, but there are really at least four.
The files input to CPP might be in any character set at all. CPPs very first action, before it even looks for line boundaries, is to convert the file into the character set it uses for internal processing. That set is what the C standard calls the source character set. It must be isomorphic with ISO 10646, also known as Unicode. CPP uses the UTF-8 encoding of Unicode.
The character sets of the input files are specified using the -finput-charset= option.
All preprocessing work (the subject of the rest of this manual) is carried out in the source character set. If you request textual output from the preprocessor with the -E option, it will be in UTF-8.
After preprocessing is complete, string and character constants are converted again, into the execution character set. This character set is under control of the user; the default is UTF-8, matching the source character set. Wide string and character constants have their own character set, which is not called out specifically in the standard. Again, it is under control of the user. The default is UTF-16 or UTF-32, whichever fits in the targets
wchar_t type, in the target machines byte order.1 Octal and hexadecimal escape sequences do not undergo conversion; '\x12' has the value 0x12 regardless of the currently selected execution character set. All other escapes are replaced by the character in the source character set that they represent, then converted to the execution character set, just like unescaped characters.
In identifiers, characters outside the ASCII range can be specified with the \u and \U escapes or used directly in the input encoding. If strict ISO C90 conformance is specified with an option such as -std=c90, or -fno-extended-identifiers is used, then those constructs are not permitted in identifiers.
UTF-16 does not meet the requirements of the C standard for a wide character set, but the choice of 16-bit
wchar_t is enshrined in some system ABIs so we cannot fix this.