Yuan to strengthen against the US dollar

Tracy Li
Economists expect the stabilization of US-China relations and continued foreign portfolio inflows to push the yuan stronger against a weakening dollar in 2021. 
Tracy Li
Yuan to strengthen against the US dollar

Economists expect the stabilization of US-China relations and continued foreign portfolio inflows to push Chinese yuan stronger against a weakening US dollar this year.

USD/CNY will trade around 6.4 at the end of 2021 and the exchange rate may move close to 6.2 in the middle of the year if the US dollar weakens more notably, and could fluctuate in a wide range depending on the greenback’s cross rates and pandemic developments, said Wang Tao, UBS’s chief China economist.

China's expected sizable trade surplus, further portfolio inflows thanks to opening-up and more index inclusion, and elevated onshore-offshore interest differential are all supportive factors for its currency, she noted.

Liu Li'nan, a Deutsche Bank China macro strategist, estimated that the conversion rate of the yuan against the US dollar will reach 6.20 in 2021, and the appreciation trajectory will be mainly concentrated in the first half of the year.

In order to further enhance the internationalization level of the yuan and increase its attractiveness for making cross-border settlements, China’s central bank will maintain the flexibility of the yuan’s exchange rate, Liu added.

“Too much” yuan appreciation, however, could be harmful to businesses, economists at Standard Chartered Bank warned.

Industrial profit growth tends to slow when the yuan appreciates by over 6.5 percent year on year against the US dollar, possibly due to slower export growth, increased import substitution for domestically made goods, reduced export revenue when US dollar receipts are converted into Chinese yuan or tighter financial conditions, according to Li Wei and Ding Shuang, two economists at the bank.

China’s foreign exchange reserves stood at US$3.22 trillion at the end of last year and, since late May, the yuan has appreciated by 10 percent against the greenback (6.48 lately).

To temper the pace of appreciation, the People's Bank of China removed the FX risk reserve ratio for forward sales and phased out the use of "countercyclical factor" in pricing formula of daily USD/CNY fixing, both in October 2020.

In addition, the bank also rolled out measures in December-January to encourage more Chinese enterprises' lending to overseas entities, and lowered the cap for onshore corporate and banks' offshore financing, which should help balance China's cross-border capital flows, UBS’s Wang said.

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