SHANGHAI: China’s yuan was little changed against the dollar on Wednesday as traders weighed mixed credit data for COVID-hit December, though most analysts expect a strong pick-up in borrowing as a post-pandemic recovery gathers pace this year.
Traders also continued to debate the scope and timing of further monetary easing which is expected in China in coming month to support the economic rebound.
Although an expected cut in Chinese interest rates and banks’ required reserve ratios (RRR) later this year could strengthen the US yield advantage, the long-term appreciation trend of the yuan remains on track, economists say.
The yuan has jumped roughly 1.8% against the dollar so far this year to a near five-month high, buoyed by the abrupt dismantling of China’s strict COVID-19 curbs in December which were weighing heavily on consumer and business confidence and economic activity.
But it steadied on Wednesday, trading around 6.7755 per dollar by late morning.
Prior to the market open, the People’s Bank of China set a weaker midpoint rate at 6.7756 per dollar.
China’s yuan hits fresh 5-month high, dollar demand caps gains
Data on Tuesday showed new bank lending in China unexpectedly rose in December from the previous month, setting a new yearly record, but households were more wary about borrowing and aggregate financing missed expectations.
Muted yuan trading on Wednesday “…underscored investor’s intention to look past seasonal weakness in anticipation for (a)demand recovery this quarter,” MayBank wrote in a note.
Morgan Stanley has bumped up its China growth, stock market and yuan forecasts again, becoming the latest Wall Street heavyweight to do so as the economy reopens.
The bank raised its target for the yuan to 6.65 per dollar.
Liu Ying, financial researcher at the Renmin University of China, said expected monetary easing – including policy rate and RRR cuts — could widen the US-China yield spread and curb the yuan’s climb in the short term.
While that could increase yuan volatility, “the big trend of yuan appreciation is inevitable,” she wrote in a commentary, citing expectations of a robust economic rebound this year.
That view was echoed by Zhou Hao, chief economist at brokerage house Guotai Junan International.
“While we do expect further policy easing by the Chinese central bank in the coming year, the improving expectations on economic growth suggest that market interest rates for yuan are bias to the upside,” Zhou said in a note on Wednesday.
“The currency might still have upside potential if China’s growth momentum accelerates.”
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