The yuan had a stellar 2017, with expectations that this year may be solid if a bit quieter for the currency.

The yuan capped its first annual gain in four years with a rally against the US dollar in the past two weeks, touching 6.48 yuan to the dollar last week, its strongest value since May 2016.

Apparently confident that depreciation pressure is licked, at least for the time being, the People’s Bank of China eased its controls over the mechanism that sets the midpoint value of the currency. In response, the yuan slid just a tad.

For the whole of 2017, the yuan gained 6.7 percent against the greenback on the spot market, its strongest appreciation in nine years.

The yuan’s performance defied widespread predictions that it would depreciate last year and put to rest the debate about whether the central bank would allow the yuan to fall below 7 to the dollar.

While a weaker US dollar was cited as the main driver of the stronger yuan, steady domestic economic growth in China, trade surpluses, limits on capital outflows and the introduction of a “counter-cyclical factor” in deciding the daily yuan fixing rate helped support the currency.

Central bank direct intervention in the foreign-exchange market through money injections — a factor once heavily used to influence the direction of the yuan — was downplayed during the currency’s recent appreciation.

“The authorities have been relatively ‘hands off’ but still appear cautious about capital outflows,” HSBC said in a report. “The yuan is not at the start of a new one-way appreciation trend, but it may overshoot its fair value in the near term.”

China’s foreign-exchange reserves rose in December for the 11th consecutive month to US$3.14 trillion, prompting economists and central bank officials to note that smaller injections of US dollars were needed to support the yuan.

When the yuan is measured against a basket of currencies of major trade partners, the CFETS index reveals a quieter picture for the currency. The index was up a mere 0.02 percent in 2017. HSBC said the yuan is showing signs of becoming more of a “normal currency.”

“In our view, the People’s Bank of China is keen on implementing a ‘clean floating’ — minimal foreign-exchange intervention while retaining controls over some capital flows,” HSBC said.

Zhou Hao, senior emerging market economist at Germany’s Commerzbank, wrote on his public WeChat account that the central bank is not the main driver behind the recent yuan rally. Rather, he said, appreciation was driven by market players trying to profit from higher interest rates in China amid a weaker US dollar.

But, he added, history has taught us that the central bank will step in if yuan appreciation starts to threaten financial stability.

New measures

In the first two weeks of the new year, a series of measures implemented by the central bank did reveal some mixed views about foreign exchange market intervention.

On the one hand, the central bank announced measures to encourage more cross-border use of the yuan in trade and foreign direct investment by both companies and individuals. It also reiterated guarantees that foreign investors will be able to repatriate legal investment returns offshore.

On the other hand, central bankers tightened controls over how much money Chinese residents may withdraw overseas on their bankcards.

The upper annual withdrawal limit of 100,000 yuan per bank account was changed to 100,000 yuan per person. That ends the practice of people using multiple cards to withdraw sums beyond the limit.

Early last week, a Bloomberg report said the central bank had ordered a halt to the application of the mysterious “counter-cyclical factor” that kicked off the yuan’s appreciation last May.

After that, the yuan’s daily fixing rate, around which the yuan is allowed to trade within a 2 percent range, fell to 6.51 and the market followed.

Though it’s difficult and probably risky to make predictions about any financial markets, economists are still trying to read the tea leaves on where the currency may be headed in 2018.

Opinions are divided, but there is broad consensus that the yuan will remain mostly stable against a basket of currencies.

“For this year, I would say 6.80,” Zhou with the Commerzbank said of the currency’s average value this year. “But market views are more divergent, especially after the yuan hit the 6.50 mark. It is not a bad thing.”

Wang Tao, chief China economist of UBS, said she thinks the yuan will weaken mildly to 6.70 per US dollar by the end of the year, amid stable economic growth and government efforts to mitigate risks in the financial sector.

The outlook for exports remains rosy as the global economy continues its recovery, she said, and domestic interest rates are likely to follow the US trend — mildly upward. Controlling significant capital outflows will remain on the agenda, Wang added.

“These conditions suggest that the yuan will be relatively stable this year,” she said. “But worries about depreciation may flash again if the US dollar strengthens more than we expect.”

Unknown factors such renewed trade wars, geopolitical conflicts and the unpredictability of US President Donald Trump could shake the foundation of current expectations, Wang added.

The Netherlands-based ING Bank, which took second place in a recent Bloomberg ranking of institutional accuracy in forecasting the dollar-yuan exchange rate, is predicting the yuan will stand at 6.30 by the end of this year.

“I expect a milder appreciation pace of 3 percent in 2018, compared with 6.6 percent in 2017,” said Iris Peng, ING’s China economist. “The yuan needs not appreciate as quickly because capital outflows have slowed due to policies that keep an eye on outbound direct investments, personal remittances and overseas cash withdrawals.”

Peng said stemming capital outflows is still an important factor in avoiding risks to the system. “US dollar weakness is likely to persist because the market has priced in better data for the US,” Peng said. “The foreign-exchange market needs unexpectedly good or unexpectedly bad data to move the greenback.”