China’s upbeat economic prospects underpin yuan’s long-term strength

Beijing: Despite short-term fluctuations, the Chinese yuan has been able to maintain its basic stability in the longer term, thanks to the country’s ability to effectively handle market volatility and its solid economic fundamentals.

The central parity rate of the yuan strengthened for a fifth consecutive trading day against the U.S. dollar, 88 pips firmer from the previous trading day to 7.1786, according to the China Foreign Exchange Trade System (CFETS). This marks the yuan’s strongest level in nearly two weeks.

The yuan’s central parity rate has strengthened by 364 pips against the greenback this week.

In China’s spot foreign exchange market, the yuan is allowed to rise or fall by 2 percent from the central parity rate each trading day. The central parity rate of the yuan against the U.S. dollar is based on a weighted average of prices offered by market makers before the opening of the interbank market each business day.

In the offshore market in Hong Kong, the yuan strengthened 1.13 percent this week, erasing losses recorded in the previous days and rebounding from its weakest point in nearly 11 months last week.

Yuan’s return to strength this week came after the People’s Bank of China (PBOC), the country’s central bank, pledged to resolutely fend off risks of yuan exchange rate overshooting. The PBOC said that the country’s financial authorities would take action when needed to correct one-sided and pro-cyclical behaviors.

The central bank announced a plan to issue 15 billion yuan (about 2.1 billion U.S. dollars) worth of six-month yuan-denominated bills in Hong Kong on Sept. 19, five billion yuan of which will be for roll-overs of existing bills and 10 billion yuan for new ones, according to Shanghai Securities News.

This is the second issuance in a month. This year, the central bank has issued nine batches of bills in Hong Kong totaling 110 billion yuan.

A larger issuance of the yuan bills in the Asian financial hub can moderately tighten the yuan liquidity in the offshore market, and make it more expensive for currency traders to short the yuan, said Wang Qing, an analyst at Golden Credit Rating.

A slew of measures, including the increase in the scale of the offshore central bank yuan bill issuance and cut in foreign exchange reserve requirement ratio, indicated that China’s financial authorities are keen to stabilize the yuan exchange rate and have the capacity, confidence and conditions to maintain its basic stability, analysts said.

Yuan’s recent weakness was mainly a passive depreciation on the back of a stronger U.S. dollar, but the yuan has stayed strong against other major currencies, said Bruce Pang, the Greater China chief economist of JLL, a real estate and investment management services firm.

Overnight, the dollar index, which measures the greenback against six major peers, decreased 0.06 percent to 105.3192 in late trading, but it is still near its highest level in six months.

The CFETS yuan exchange rate composite index, which measures the yuan’s strength relative to a basket of currencies, gained 0.56 points from the previous week to 97.77 on Sept. 8, according to the latest data.

“China’s central bank still has plenty of policy tools to deal with abnormal fluctuations on the forex market,” and what the PBOC has done recently is aimed at sending a signal for expectation management and moderating the market fluctuations, said Ming Ming, chief economist at CITIC Securities.

Analysts believe that in the near term, the yuan exchange rate might see challenges given the uncertainties of the Fed’s pace in rate hikes, the policy split between China and the United States, and the souring global risk appetite, but from a longer-term perspective, the yuan will be buttressed by the country’s solid economic fundamentals and pro-growth policies.

The Chinese economy has continued the upward trend so far this year, despite challenges stemming from the complex global environment and insufficient domestic demand.

A series of economic data released Friday, including the value-added industrial output and retail sales, further substantiates that the recovery of the world’s second-largest economy is gathering momentum.

The improving data received additional tailwinds from the central bank’s recent decision to cut banks’ reserve requirement ratio for a second time this year in order to consolidate the foundation for economic recovery and boost market sentiment.

With the effects of China’s supportive measures gradually paying off, there will be more favorable factors for the yuan exchange rate in the mid and long term, Ming said.

According to Wang Chunying, deputy head and spokesperson of the State Administration of Foreign Exchange, as the macro-regulation policies gradually take effect, China’s economic recovery will continue apace, further consolidating its support of the forex market. Meanwhile, the tightening monetary policies in major developed economies are nearing their end, and the spillover effects will generally weaken.

Looking forward, she said, “China’s forex market has the foundation and conditions to be more stable in the future.”