Market jitters unlikely to cause big yuan depreciation

The yuan faces some level of depreciation pressure amid market jitters caused by trade conflicts, but the regulators are not likely to manipulate much as the currency's fluctuation is becoming more market-oriented, said analysts.

Guan Tao, a former senior official with the State Administration of Foreign Exchange, said the capital flows this year are expected to remain relatively stable, while uncertainties may exert some downward pressure to the yuan's exchange rate in the near term, including possible stronger dollar driven by possible US interest rate hikes and in particular, trade conflicts with the United States.

He said much progress has been made in improving transparency as recent data shows the regulators have become more tolerant to the yuan's fluctuation, but more efforts are needed to continue promoting exchange rate reforms.

"We do not expect the authorities to proactively weaken the currency, but the multi-year low interest rate differential has naturally led to depreciation pressures (despite capital control)," said a report led by economist Song Yu with Goldman Sachs.

That said, potential policy considerations to avoid additional complications in the US-China trade relationship and to mitigate domestic residents' currency worries may restrain the scope for much further depreciation, they wrote.

"We maintain our current forecast, which is 6.70 yuan per dollar in 3 months, for now, although we see risks skewed to a weaker yuan," the report said.