Forex Comment Feb 01

Yuan rising in an updraft, further appreciation likely

Zhou Chengjun, director of the People's Bank of China's Financial Research Institute, wrote a long note on the outlook of the yuan with policy recommendations; He says the Chinese currency has entered a 'rising channel'

Yuan rising in an updraft, further appreciation likely
Image: AFP.

(ATF) China's central bank set parity for the yuan and US dollar lower on Monday (Feb 1) – at 6.4623, which was a reduction of 86 points. The closing price of the last trading day was less than the middle price, and intra-day volatility was small.

On Friday, Zhou Chengjun, director of the Financial Research Institute of the People's Bank of China, wrote a long note published by the bank. He explained in detail the outlook of yuan exchange rate trends and relevant policy recommendations.

Zhou said the yuan has entered a so-called "rising channel".

Based on an analysis of relative purchasing power of currencies, current account surplus, international use of yuan, foreign exchange hedging transactions, liquidity management and other determinants of exchange rate generated under capital and financial items, Zhou personally judged that in the current international and domestic economic and financial situations, there is room for further appreciation of the yuan exchange rate.

In the context of China's increased two-way financial opening up, high-quality economic development, and adoption of a new dual-cycle development pattern, he said more attention should be paid to the internationalisation of the yuan and the mechanism under which the yuan exchange-rate is determined in regard to China's current account balance of payments, as well as the corresponding supply-chain adjustment and for the impact of upgrading of the industrial structure, comprehensive countermeasures should be considered as early as possible to ensure that China's industrial competitiveness and anti-risk ability can be better maintained as the yuan's value appreciation.

In related news on January 29, the State Administration of Foreign Exchange announced data on the transaction profile of China’s foreign exchange market late last year, showing that in December 2020, China’s foreign exchange market (excluding foreign currency pair markets, the same below) totalled 22.64 trillion yuan (equivalent to $3.46 trillion). Among them, bank-to-customer market transactions were 3.7 trillion yuan ($570 billion), and interbank market transactions were 18.94 trillion yuan ($2.9 trillion); the spot market had a cumulative transaction of 10.53 trillion yuan ($1.6 trillion), the derivatives market has a cumulative turnover of 12.11 trillion yuan ($1.85 trillion).

From January to December 2020, a total of 206.38 trillion yuan (nearly $30 trillion) was traded in the Chinese foreign exchange markets.


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