Chinese Yuan Expected to Remain Strong Amid Challenges

Experts predict that the Chinese yuan, also known as the renminbi, will continue to show strength and potentially recover later this year, despite facing external challenges. This optimistic outlook stems from solid productivity within the country, significant foreign exchange reserves, and enhanced policy support aimed at promoting economic growth.

While the yuan may experience short-term challenges due to market concerns regarding potential tariff increases from the United States and the robust performance of the US dollar, Chinese financial authorities are in a good position to implement policy adjustments to prevent any drastic decline in the yuan's value. One indication of this strategy is the planned issuance of central bank bills in Hong Kong.

According to Hong Hao, chief economist at GROW Investment Group, the yuan may face immediate pressure against the dollar because of fears surrounding US tariff hikes on Chinese exports. However, he believes that as these concerns lessen, the yuan is likely to rebound.

"The yuan is actually undervalued in the long term," Hong stated. He emphasized that the primary factor influencing exchange rates is labor productivity. China is currently outperforming many other economies, such as India and Vietnam, in this regard.

On Tuesday afternoon, the onshore yuan increased against the dollar, showing a value of 7.3231, which represents a rise of 65 basis points since the previous day. Earlier, the yuan reached a low of 7.3301 against the dollar, marking its weakest position since September 2023.

The historical trend suggests that while the yuan may initially react to tariff threats with volatility, recovery typically follows within a few months. Hong noted that China's large foreign exchange reserves will further help stabilize the currency.

Recent data revealed that China's foreign exchange reserves amounted to $3.2024 trillion at the end of December, remaining comfortably above the $3 trillion threshold. Although this figure represents a 1.94 percent decrease compared to November, it still supports the yuan's stability.

Wang Qing, chief macroeconomic analyst at Golden Credit Rating International, stated that China's foreign exchange reserves are likely to remain adequately robust, slightly exceeding $3 trillion, amid a global trend toward more lenient financial conditions. This reserve strength provides a solid foundation for maintaining the yuan's value.

For the short term, financial officials do not require intervention in the foreign exchange market using these reserves, as the yuan has shown relative stability and even appreciated against a basket of currencies. Moreover, the People's Bank of China has various policy tools at its disposal to ensure stability.

In a recent move to manage offshore renminbi liquidity, the central bank plans to issue additional offshore RMB central bank bills in Hong Kong this month. This issuance is expected to exceed previous amounts and is designed to meet the high demand from international investors looking for quality RMB bonds.

Liang Zhonghua, chief macro analyst at Haitong Securities, mentioned that beyond managing offshore liquidity, other potential policy options include adjusting the countercyclical factor for the yuan's central parity rate, providing informal guidance, and managing the reserve ratio for forward foreign exchange sales, along with overseeing cross-border financing.

yuan, economy, forex