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Yuan gains value against US dollar, appreciating nearly 3% in January alone

The Chinese yuan rose against the US dollar for the third month in a row with its value appreciating nearly 3 percent in January. Analysts expect that yuan’s upward trajectory would continue in 2023, fueled by a resurgent Chinese economy, depreciation of US dollar and market expectations that the US Federal Reserve will slow down the pace of interest rate hikes.

The yuan’s spot rate closed at 6.7400 to the US dollar on Wednesday, up 2,114 points from 6.9514 at the end of 2022, gaining nearly three percent in value against the greenback.

In January, the spot rate of the yuan once rose to an intraday high of 6.69 against the dollar, an 8.6 percent appreciation from the low reached in November 2022. Meanwhile, the central parity rate of yuan has appreciated by 2.93 percent against the US dollar in January, marking the third consecutive month the yuan has kept strengthening.

The recent appreciation of yuan is mainly due to the rebound of the Chinese economy and the depreciation of the US dollar, Tan Xiaofen, an expert at the School of Finance at the Central University of Finance and Economics, told the Global Times on Wednesday.

“One or two more Fed rate hikes are expected by the market in the first half of 2023, but they should be modest, probably by 25 to 50 basis points apiece,” said Tan.

China’s policies to stabilize its economy, optimized anti-coronavirus measures and easier credit lines to support the real estate sector has supported an economic rebound since late 2022, analysts claimed. 

“Based on past appreciation cycles and overall expectations for 2023, the exchange rate of yuan could rise to around 6.5 against the greenback in the most optimistic scenario,” said Tan.

The basis for a stable yuan value is stronger in 2023 than it was before the pandemic, although the yuan will still be influenced by the US dollar’s trends, Dong Shaopeng, a senior research fellow at the Chongyang Institute for Financial Studies at Renmin University of China, told the Global Times on Wednesday.

Analysts said they are optimistic about financial stability in China, which will further support the country’s economic recovery.

“It has become a firm orientation of the central government that the financial sector should focus on serving the real economy,” said Dong.

Dong noted that China has ample room for monetary management. The country will continue to fine-tune financial policies for small, medium and micro-sized enterprises and industries related to people’s livelihood. 

Meanwhile, confidence toward China’s economic recovery can be seen from the volume of overseas capital inflows to purchase yuan-denominated assets, which will also bolster China’s financial fundamentals, analysts said.

Net foreign capital inflows are expected to reach 200 billion yuan ($29.7 billion) to 250 billion yuan in 2023, read a report by Yuekai Securities, while CICC expected inflows to reach 300-400 billion yuan.