Yuan to remain largely stable despite hurdles

Despite recent swings, the Chinese yuan is expected to remain largely stable with manageable depreciation pressure this year, thanks to sound economic fundamentals and export resilience, experts said on Thursday.

They made the remarks amid a strengthening US dollar following tightening by the US Federal Reserve that put pressure on the yuan, sending the central parity rate of the yuan against the dollar down 102 basis points to 6.4098 on Thursday, the weakest level since mid-November.

“The yuan is expected to maintain overall stability with moderate depreciation and come in at around 6.45 against the dollar at the end of the year,” said Hu Yifan, regional chief investment officer and head of macroeconomics for Asia-Pacific with UBS Global Wealth Management, one of the world’s largest wealth managers.

Hu said China’s sound economic fundamentals and resilient export growth are expected to help offset pressure on the yuan brought by a strong dollar.

The Chinese economy may hit a nadir in the second quarter and rebound in the second half, when the COVID-19 resurgence is expected to be further brought under control and stronger fiscal support is likely to boost investment and consumption, she said.

Federal Reserve Bank of St. Louis President James Bullard said on Monday the central bank needs to move quickly to raise interest rates to around 3.5 percent this year with multiple half-point hikes and should not rule out rate increases of 75 basis points, Bloomberg reported.

Hu said she expects the US Federal Reserve to raise interest rates six times this year by 200 basis points in total, with hikes of 50 basis points each in May and July, reinforcing the strength of the greenback.

Ming Ming, co-chief economist of CITIC Securities, said a rising dollar and supply chain disruptions caused by COVID-19 resurgences in China may continue to weigh on the yuan.

“However, there is no need to be overly worried about the pressure,” Ming said, citing that supply chain disruptions have started to fade while exports are expected to stay resilient in the short run.

Wang Qian, Vanguard’s Asia-Pacific chief economist, said global investors’ strategic allocation in Chinese financial assets will also help offset the depreciation pressure on the yuan.

With the government bond yield spread between China and the US shrinking sharply, speculative money seeking short-term gains may indeed further leave the Chinese market and put some depreciation pressure on the yuan, Wang said.

But reasonable valuation levels and appealing long-term return prospects of Chinese financial assets may continue to attract long-term investors to China, rendering the pressure of capital outflow and yuan depreciation controllable, she said.

Wang added that Chinese stocks are expected to offer a nominal annualized return of between 6 percent and 8 percent in the next 10 years, higher than the estimated return of 3.9-5.9 percent over the same period provided by global stock markets, excluding China.