Renminbi on rebound as recovery sets

Experts highlight growth, fundamentals as onshore USD/CNY breaches 6.8

Supported by China's economic recovery amid downward pressure on other economies, the renminbi's bullish momentum has become more noticeable, currency market experts said on Monday after the Chinese currency's exchange rate against the U.S. dollar breached the 6.8 psychological level.

The onshore USD/CNY jumped 876 basis points on Monday to close at 6.7712, up 2.5 percent from the beginning of this year.

The renminbi's offshore exchange rate against the greenback, which reflects international investors' outlook on the Chinese currency, once touched 6.7669 during afternoon trading, with an intraday surge of more than 600 basis points.

The Chinese yuan has thus reported gains for five consecutive trading days since this year began. It is also the first time for USD/CNY to drop below 6.8 since August 2022. The renminbi has gained 6 percent in all since November 2022.

Li Liuyang, a foreign exchange researcher from China International Capital Corp Ltd, said China's faster-than-expected economic recovery is among the factors that have been propping up the renminbi's recent rebound.

While the world's major economies, including the United States and Europe, are approaching a possible recession, China's quick economic recovery is conducive to the inflow of northbound capital, or the amount that overseas investors pump into A shares via the stock connect program linking Shanghai, Shenzhen and Hong Kong bourses. Such capital inflows will also help the renminbi to improve its performance in the currency market, he said.

The northbound capital reported a net inflow of 7.7 billion yuan ($1.1 billion) on Monday, when the benchmark Shanghai Composite Index rose for the sixth consecutive trading day to 3176.08 points, up 0.58 percent from Friday's close. Northbound capital inflow has exceeded 27 billion yuan so far this year.

The seasonal factor has also helped lift the renminbi's value, said Li. Exporters usually make cyclical exchange settlement before Chinese Lunar New Year, which starts on Jan 22 this year. Such collective settlement usually drives up the renminbi's exchange rate in the short term, he said.

Goldman Sachs analysts led by Kamakshya Trivedi wrote in a report on Jan 6 that USD/CNY is likely to touch 6.5 by the end of this year, driven by market optimism that China may further optimize its COVID-19 control policies. The previous estimate was 6.9.

In an interview with the Xinhua News Agency on Saturday, Guo Shuqing, Party secretary of the People's Bank of China, the country's central bank, said the renminbi has rebounded strongly since the end of last year amid continued foreign capital inflows. This reflects the global investors' positive outlook on China's economic growth and their confidence in the country's economic fundamentals such as prices.

In the mid to long run, the renminbi exchange rate will see two-way fluctuations. But the overall trend is upward, he said.

Data released by the State Administration of Foreign Exchange on Saturday showed that China's foreign exchange reserves exceeded $3.12 trillion by the end of December, up $10.2 billion from a month earlier. This was a rise for the third month in a row.

Wen Bin, chief economist with China Minsheng Bank, said China's foreign exchange reserves stood above $3 trillion throughout 2022.China's current account will continue to report a surplus in 2023 given the country's strong resilience in exports.

As China's economic growth further stabilizes, RMB assets will gather greater appeal and the country's balance of payments will remain stable. All these will translate into a stable scale of foreign exchange this year, he said.