RMB expected to stay resilient, rebound despite headwinds

Despite external headwinds, the Chinese yuan is expected to maintain its resiliency and rebound later this year, thanks to the country's productivity strength, abundance of foreign exchange reserves and strengthened policy support for economic growth, experts said.

While short-term pressures on the yuan may continue due to market jitters related to possible United States' tariff hikes and the US dollar's strength, Chinese financial authorities are well-positioned to amplify policy adjustments to fend off any excessive yuan depreciation, signaled by the upcoming central bank bill issuance in Hong Kong, they added.

Hong Hao, chief economist at GROW Investment Group, said the yuan, or the renminbi, may still face short-term weakening pressures against the greenback due to the looming potential US tariff hikes on Chinese exports, but will likely rebound later as the sentiment simmers down.

"The yuan is actually undervalued in the long run," Hong said. "The most fundamental determinant of exchange rates is the comparison of labor productivity between two economies. At this stage, China's labor productivity is far higher than that of other economies in the world, including India and Vietnam."

The onshore yuan rallied against the dollar to 7.3231 as of Tuesday afternoon, up 65 basis points from Monday's close, according to market tracker Wind Info. Earlier on Monday, the yuan touched 7.3301 against the dollar, the lowest since September 2023.

"History tells us that it can be stressful for the yuan at first amid tariff threats, but within a few months, the yuan will get through it," Hong said, adding that China's abundant foreign exchange reserves will also underpin the currency.

Official data showed on Tuesday that the country's foreign exchange reserves came in at $3.2024 trillion as of the end of December, well above the $3-trillion mark, despite dropping 1.94 percent compared with November.

Wang Qing, chief macroeconomic analyst at Golden Credit Rating International, said the size of China's foreign exchange reserves will stay "appropriately sufficient" and remain slightly above the $3-trillion mark amid a global shift toward loose financial conditions, providing a solid foundation for yuan stability.

At least in the short term, financial authorities do not need to intervene in the foreign exchange market using the reserves, Wang said, as the yuan has remained stable and even strengthened against a basket of currencies, while the People's Bank of China, the country's central bank, has ample policy tools to safeguard its stability.

In a move that analysts said would help withdraw offshore renminbi liquidity, the central bank is planning to issue additional offshore RMB central bank bills this month in Hong Kong, after vowing to resolutely guard against the risk of exchange rate overshooting last week.

Sources close to central bank authorities said the upcoming issuance would far exceed previous single issuances, meeting strong demand from overseas investors for high-grade RMB bonds.

Liang Zhonghua, chief macro analyst at Haitong Securities, said that besides offshore liquidity management, other potential policy levers include the countercyclical factor for the yuan's central parity rate, window guidance, which is also called informal guidance, the risk reserve ratio for forward foreign exchange sales and macro prudential management of cross-border financing.