China’s yuan steady before key parliamentary meeting, but outlook weak

SHANGHAI: The yuan was steady on Monday, as China’s central bank maintained its efforts to keep the currency stable ahead of a key annual meeting of the nation’s parliament this week that will chart the economy’s growth path.

But analysts expect the yuan to face downward pressure over the short term amid a stuttering economy, expectations of higher-for-longer US interest rates and falling Chinese bond yields.

The onshore spot yuan was changing hands around 7.2 at midday, slightly weaker than the previous session close, even after the People’s Bank of China set a stronger midpoint rate.

The PBOC’s daily fixings have been consistently stronger than market expectations recently - the deviation averages around 880 pips in the past month - reflecting authorities’ determination to hold the line, Alvin Tan, head of Asia FX strategy at RBC Capital Markets, said.

China is widely expected to set a growth target of 5%, the same as last year, at the National People’s Congress (NPC) meeting that starts on Tuesday.

Analysts say meeting the target will be a challenge as a protracted property crisis, low consumption, slow global growth and geopolitical tensions drag on activity.

“The real estate issue is still unresolved, and China’s dependence on external demand will also encounter uncertainties due to the ongoing geopolitical tensions,” Alicia Garcia Herrero, Asia Pacific chief economist at Natixis said in a note.

UBS chief China economist Tao Wang said that “we maintain our baseline forecast of GDP growth at 4.6% in 2024, as the base effect of post-COVID recovery fades and property downturn continues to be a drag.”

China’s yuan eases as manufacturing weakness persists; eyes on NPC session

Highlighting investor unease about the economic outlook, the yield on China’s 30-year treasury bond fell to historic low of 2.479% on Monday. That is even lower than China’s one-year policy rate of 2.5%.

The recent shift in market expectations for the Federal Reserve to keep rates elevated until at least June, versus earlier bets for cuts to begin in March, will likely exert more pressure on the yuan due to the wider US-China yield gap, analysts say.