Resilience of the Renminbi Amid External Challenges

The Chinese yuan, also known as the renminbi (RMB), is anticipated to show strength and possibly rebound later this year, despite various external challenges. This optimism is largely credited to China's robust productivity, its substantial foreign exchange reserves, and enhanced policy support geared towards stimulating economic growth, according to expert analyses.

Experts indicate that while the yuan may experience short-term volatility due to market concerns regarding potential tariff increases from the United States and the prevailing strength of the US dollar, Chinese financial authorities are prepared to implement policy measures to mitigate excessive declines in the yuan's value. One of the indicators of this preparedness is the imminent issuance of central bank bills in Hong Kong.

Short-term Pressures and Long-term Prospects

Hong Hao, the chief economist at GROW Investment Group, noted that despite potential short-term weakening against the dollar attributed to fears of US tariffs on Chinese exports, the yuan is likely to recover as the situation stabilizes. He emphasized that the long-term outlook for the yuan remains strong, as it is currently undervalued. According to Hong, labor productivity is a core factor influencing exchange rates, and China's labor productivity is significantly higher compared to other economies like India and Vietnam.

As of Tuesday afternoon, the onshore yuan was valued at 7.3231 against the dollar, showing an increase of 65 basis points from the previous day’s closing figure. Earlier on Monday, the yuan had dipped to 7.3301, marking its lowest point since September 2023.

Hong also mentioned that historical patterns indicate that while the yuan may face initial stress due to tariff threats, it typically finds its footing within a few months, aided by China’s plentiful foreign exchange reserves.

Stable Foreign Exchange Reserves

Recent data highlighted that China’s foreign exchange reserves stood at $3.2024 trillion at the end of December, remaining comfortably above the $3 trillion threshold despite a slight month-to-month decline of 1.94%. Wang Qing, chief macroeconomic analyst at Golden Credit Rating International, reassured that the level of these reserves will continue to be adequate under shifting global financial conditions, providing a strong basis for the stability of the yuan.

In the immediate future, Wang asserted, there wouldn’t be a necessity for authorities to dip into foreign exchange reserves, especially considering that the yuan has shown stability and even strength against a range of global currencies. Additionally, the People's Bank of China possesses a variety of policy tools to maintain currency stability.

Central Bank Initiatives and Liquidity Management

In a strategic move, the central bank plans to issue more offshore renminbi central bank bills this month in Hong Kong. This effort is aimed at managing the liquidity of the offshore renminbi and comes on the heels of a commitment to prevent excessive exchange rate fluctuations. Analysts expect this issuance to be notably larger than previous ones, responding to strong demand from international investors for high-quality RMB bonds.

Liang Zhonghua, chief macro analyst at Haitong Securities, pointed out that apart from managing offshore liquidity, several other policy measures may influence the performance of the yuan. These include adjustments to the countercyclical factor for the yuan's central parity rate, informal guidance, risk reserve ratios for foreign exchange sales, and the broader macro prudential management of cross-border financing.

RMB, Resilience, Currency