The 'painful winter' is over for the yuan

Updated 2017-08-11 11:39:38 Global Times

Currency continues to strengthen against the dollar

Analysts declared that a painful winter for the exchange rate of the yuan against the U.S. dollar has passed as improving fundamentals and a weakening dollar propelled the Chinese currency in an upward motion over the past few months.

With the yuan increasingly firm against the greenback, earlier market expectations for persistent yuan depreciation have been reversed and a consensus is in the making that the yuan will continue to stabilize, analysts said.

On Thursday, currency traders responded decisively after the People's Bank of China set the central parity for trading at the strongest level in ten and half months, lifting the yuan both in onshore and offshore trading.

The Chinese central bank set the central parity rate at 6.6770 to the dollar prior to market opening, the strongest level since September 29, 2016. The yuan is allowed to fluctuate within 2 percent above or below the central parity rate.

Following the stronger official guide, the exchange rate for onshore yuan trading gained 166 bips from Wednesday's closing to close at 6.6610 per dollar on Thursday, the firmest level since August 25, 2016, according to financial website wallstreetcn.com.

In the offshore market, the yuan was trading at 6.6699 per dollar at 10:00 pm Beijing time on Thursday, strengthening 0.32 percent from the previous day's closing, according to financial information provider Marketwatch.

Thursday's gain adds to a months-long surge of the yuan against the dollar. The Chinese currency has gained 4 percent against the dollar so far this year, according a report on domestic financial news site eastmoney.com on Thursday.

That led analysts to declare that the yuan has moved past its dark days.

Chen Shi, head of International Research at Industrial and Commercial Bank of China, wrote in a note: "The yuan's exchange rate has got out of the painful, cold winter and will return to a long-term trajectory of stable movement."

In the note that was sent to the Global Times on Thursday, Chen wrote that expectations for a stabilizing yuan are replacing expectations of depreciation as a market consensus.

Liu Dongliang, a senior analyst at China Merchants Bank, echoed that sentiment in a separate note sent to the Global Times on Thursday.

"There is no more market basis for persistent yuan depreciation and the phase of heavy depreciating pressure on the yuan's exchange rate is over," Liu said.

Improving conditions

The two analysts attribute the yuan's recent surge to improving conditions for the Chinese currency amid better-than-expected economic growth, a rise in foreign exchange reserves and a weakening dollar.

The Chinese economy grew 6.9 percent year-on-year in the first half of 2017, 0.2 percentage point faster than the pace in the same period last year and well above the 6.5 percent growth rate target set by the Chinese government for the whole year.

On top of that, China's foreign exchange reserves expanded for a sixth straight month in July to .08 trillion, increasing 0.8 percent from June, according to official data released on Monday.

"The improving fundamentals for the yuan and market expectations consolidated the foundation for the long-term stability of the yuan's exchange rate," Chen wrote.

The downward trend of the dollar's exchange in the first half, due mainly to the fall of "Trump trade" (a surge in U.S. stocks, Treasury yields and the dollar after Donald Trump won the U.S. presidential election) and better-than-expected economic performance in Europe and Japan, also lifted up the yuan, Liu said.

Since January, the dollar has lost more than 11 percent against the euro and 6 percent against the Japanese yen, The New York Times reported on Wednesday. Overall, the greenback fell 8 percent against a basket of major currencies, according to the report.

However, there is market expectation that the dollar would bounce back in the coming months and the yuan might fluctuate frequently but won't return to days of stagnation, Liu said, noting the yuan's exchange rate will fluctuate between 6.6 and 6.9 to the dollar for the remainder of the year.

With the yuan's firm position against the dollar, tight control of cross-border capital flows might be eased up and the focus will be put back on deepening financial market openness and supporting the real economy, Chen said.

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