Crossborder capital flows are expected to remain stable this year along with a more flexible yuan exchange rate mechanism and a possible current account surplus in an improved trade environment, China's top foreign exchange regulator said on Jan 17.
"China will keep improving the market-oriented foreign exchange regime and maintain flexibility of the yuan exchange rate, generally at a reasonable and stable equilibrium this year," said Wang Chunying, spokeswoman of the State Administration of Foreign Exchange, the country's foreign exchange regulator.
The phase one trade deal, which was signed on Jan 16 between China and the United States, was in line with investors' expectations. It sent positive signals to the foreign exchange market and the yuan appreciated, Wang said.
Since January, the onshore yuan has appreciated by about 1.2 percent against the US dollar. In 2019, the yuan-to-US dollar exchange rate dropped by 1.3 percent. The degree of vulnerability of the yuan-to-US dollar onshore spot exchange rate was 7.7 percent last year, an indicator of higher flexibility, according to SAFE data.
Huang Jun, chief China analyst at Forex.com, a global foreign exchange platform, said that in the short term, "it is difficult for the yuan to depreciate back to 7 and beyond, given the weaker US dollar index after the peak in the third quarter of last year. The room for yuan appreciation is limited."
Despite the global economic slowdown and sluggish international trade and investment, China recorded stable improvement in net capital inflows, especially during the fourth quarter. Last year, total cross-border receipts and payments by the non-banking sector recorded a surplus of 164.4 billion yuan ($24 billion), according to official data.
In December, foreign exchange settlement and sales by banks recorded a surplus of $2.2 billion, the first in seven months after 16 months of deficit, according to the SAFE, indicating that more corporates and individuals would like to hold the yuan.
China's economic and market fundamentals, as well as policies — including proactive fiscal policy and prudent monetary policy this year, will help support a stable foreign exchange market, Wang said.
"Since China has a huge domestic market, consumer consumption still has immense potential, and the demand for high-quality consumer goods will be strong, which will improve the imports and exports of goods this year, and stabilize the surplus of trade in goods," Wang said.
Given the relatively higher interest rate level in China, compared with other major economies, the yuan-denominated assets will continue to be attractive for global investors and more foreign central banks are likely to increase their holdings of yuan assets as reserves, she said.
China reported annual GDP growth of 6.1 percent in 2019, meeting the official target range for the year. A day before that China signed the phase one trade deal with the United States and analysts said the same will boost business confidence and support stable global economic growth this year.
"The deal was preceded by other indications of an easing in US-China economic relations, including the removal of China's currency manipulator tag by the US Treasury Department and reports that semiannual economic discussions between the two countries would be revived," said Brian Coulton, chief economist of Fitch Ratings, a global credit ratings agency.
China's foreign exchange reserves rose to a six-month high of nearly $3.11 trillion by the end of December, supported by stronger exports and stable capital inflows amid the financial sector opening-up, according to data released by SAFE on Jan 14.
The foreign exchange reserves increased by 1.1 percent over the level in 2018, and rose by $12.3 billion in a single month in December, which suggested a general supply-demand equilibrium in the foreign exchange market.
