Yuan strengthens to a 4-month high on optimism over prospects of China’s post-Covid economic recovery
- Before the currency market’s opening, the People’s Bank of China (PBOC) set the yuan’s midpoint rate at 6.9475 per dollar, 171 pips firmer than the previous fix
- In the spot market, onshore yuan opened at 6.9200 per dollar before rising to a high of 6.8785, while the offshore yuan touched a four-month high of 6.882 per dollar
China’s yuan hit a more than four-month high against the dollar on the first trading day of the year on Tuesday, underpinned by investor optimism that domestic economic recovery could set in earlier than expected.
The yuan’s strength comes after the currency weakened 7.9 per cent against the US dollar in 2022, its biggest annual drop since 1994, to reflect a buoyant greenback amid US rate hikes and an economic slowdown at home due to strict Covid-19 curbs.
Some people in Chinese cities have returned to regular activity this week and market participants have also gradually recovered from Covid infections and gone back to trading floors, currency traders said, noting trading activities were more active than at the end of last year.
Analysts at Barclays said “the accelerated reopening and likely earlier arrival of herd immunity suggests the initial reopening disruption to the economy has likely been brought forward and growth likely bottomed in the fourth quarter and should gradually recover in the first half.”
They, however, cautioned that a complete return to normal life may take several months. The analysts noted that China could face another crucial reopening test in January-February when the traditional Lunar New Year travel rush will take place. The week-long holiday starts on January 21 this year.
A vast majority of investors and analysts had projected that China would not announce reopening of its border and the economy before the annual parliamentary gathering in March. But a sudden dismantling of its Covid prevention protocols in December has caused spikes in infections across the country.
Before market opening, the People’s Bank of China (PBOC) set the yuan midpoint rate at an over two-week high of 6.9475 per dollar, 171 pips or 0.25 per cent firmer than the previous fix of 6.9646.
In the spot market, the onshore yuan opened at 6.9200 per dollar and rose to a high of 6.8785, the strongest since August 26, 2022. By midday, it was changing hands at 6.8795, 205 pips firmer than the previous late session close. Its offshore counterpart touched a more than four-month high before trading at 6.882 per dollar by midday.
Currency traders said the economic rebound hopes had helped offset the downbeat December economic indicators, including factory activity data. They also noted that seasonal demand for the local currency was lending some support as companies usually have to convert their FX receipts into the Chinese yuan for various payments for orders and bonus handouts ahead of the Lunar New Year holiday.
Separately, the PBOC has extended interbank FX market trading hours from Tuesday to further internationalise the Chinese currency, with the new hours now stretching to 1900 GMT from 1530 GMT previously.
