SHANGHAI: China's yuan weakened slightly against the dollar on Wednesday, as a former forex regulator said increasingly divergent monetary policies between China and the United States would help rein in an excessive rise in the Chinese currency.
The yuan, which hit a two-week high against the dollar on Tuesday, was changing hands at 6.3402 at midday on Wednesday, 14 pips weaker than the previous late session close, despite the People's Bank of China (PBOC) setting a firmer midpoint.
The US Federal Reserve is widely expected to accelerate monetary tightening to tame inflation this year, while the PBOC needs to use monetary policy tools to stabilise growth.
"Therefore Sino-US monetary policy divergence will likely become greater," Guan Tao, global chief economist at BOC International and a former forex regulator, said in a commentary published in the Shanghai Securities News on Wednesday.
Fed tightening is expected to reduce foreign capital inflows into China and shrink the country's trade surplus, thus helping stabilise the yuan, which needs to be better aligned with economic fundamentals, Guan said.
Official data released on Wednesday showed China has the need, and room, to ease monetary policies further.
China's factory-gate inflation cooled to its slowest pace in six months in January, while consumer price inflation also slowed year-on-year.
In turn, robust dollar settlement needs, derived from brisk Chinese exports, still lend support to the yuan, China Construction Bank said in an analysis on Wednesday.
But over the medium to long term, the yuan faces depreciationary pressure, as China's economic growth edge will likely weaken, the trade surplus may shrink, and capital outflow risks grow, the lender said.
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