China's foreign exchange regulator will likely focus on keeping the country's currency stable this year while allowing greater flexibility in the exchange rate, economists said on Monday, with some believing there may still be potential for the yuan's further appreciation against the U.S. dollar.
Yuan bulls enjoyed a cheerful year in 2017 as the currency strengthened by more than 6.3 percent against the US dollar, its greatest annual gain in nine years.
A string of factors including resilient domestic growth, tighter monetary conditions and stricter regulatory scrutiny of cross-border capital flows supported the strengthening of the Chinese currency.
Looking to 2018, economists said that the continuous recovery in global trade and China's current account surplus will continue to sup-port the value of the yuan.
They added that while the possible appreciation of the US dollar in 2018 could weigh on the value of the Chinese currency, a stronger euro may help offset the impact as the yuan's exchange rate is determined by a basket of currencies.
"The global recovery will continue to drive China's foreign trade and the country will still see a considerable trade surplus, meaning that there is still room for the yuan's appreciation," said Xiao Lisheng, a senior researcher of international finance at the Chinese Academy of Social Sciences.
Assuming that there is no major shift in China's foreign exchange policy, Xiao said the yuan could further gain by 2 to 3 percent against the US dollar in 2018.
Xie Yaxuan, an economist at China Merchants Securities, said that maintaining a stable exchange rate of the yuan will continue to be the priority for China's foreign exchange regulator and any major reform of the current exchange rate mechanism is unlikely this year.
Economists at Ping An Securities expected that the value of the yuan will see two-way fluctuations in the 6.6 to 7.0 band against the US dollar in 2018 as the Chinese regulator will continue to use policy tools to offset any potential sharp depreciation of the currency if necessary.
While China's foreign exchange regulator has been closely monitoring the country's cross-border capital flows, Xiao from the CASS said that the regulator will likely loosen capital controls to facilitate bilateral investment and key initiatives such as the Belt and Road Initiative.