Experts expect yuan to strengthen
Print Edition
Economists expect the stabilization of US-China relations and continued foreign portfolio inflows to push Chinese yuan stronger against a weakening US dollar this year.
USD/CNY will trade around 6.4 at the end of 2021 and the exchange rate may move close to 6.2 in the middle of the year if the US dollar weakens more notably, and could fluctuate in a wide range depending on the greenback鈥檚 cross rates and coronavirus pandemic developments, according to Wang Tao, UBS鈥檚 chief China economist.
China鈥檚 expected sizable trade surplus, further portfolio inflows thanks to opening-up and more index inclusion, and elevated onshore-offshore interest differential are all supportive factors for its currency, she noted.
Liu Li鈥檔an, a Deutsche Bank China macro strategist, estimated that the conversion rate of the yuan against the US dollar will reach 6.20 in 2021, and the appreciation trajectory will be mainly concentrated in the first half of the year.
In order to further enhance the internationalization level of the yuan and increase its attractiveness for making cross-border settlements, China鈥檚 central bank will maintain the flexibility of the yuan鈥檚 exchange rate, Liu added.
鈥淭oo much鈥 yuan appreciation, however, could be harmful to businesses, economists at Standard Chartered Bank warned.
Industrial profit growth tends to slow when the yuan appreciates by over 6.5 percent year on year against the US dollar, possibly due to slower export growth, increased import substitution for domestically made goods, reduced export revenue when US dollar receipts are converted into Chinese yuan or tighter financial conditions, according to Li Wei and Ding Shuang, two economists at the bank.
China鈥檚 foreign exchange reserves stood at US$3.22 trillion at the end of last year and, since late May, the yuan has appreciated by 10 percent against the greenback (6.48 lately).
To temper the pace of appreciation, the People鈥檚 Bank of China removed the FX risk reserve ratio for forward sales and phased out the use of 鈥渃ountercyclical factor鈥 in the pricing formula of daily USD/CNY fixing, both in October 2020.
In addition, the bank also rolled out measures in December and January to encourage more lending by Chinese enterprises to overseas entities, and lowered the cap for onshore corporate and banks鈥 offshore financing, which should help balance China鈥檚 cross-border capital flows, UBS鈥檚 Wang suggested.
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