China's Yuan Surges Past Key Milestone as Policy Support Boosts Confidence

The Chinese yuan has rallied past the 7 per dollar milestone for the first time in 16 months, driven by a raft of measures to support the Chinese economy and the recent Federal Reserve rate cut that has kept the dollar on the back-foot. This resurgence in the yuan's value reflects growing investor confidence in China's economic prospects and the effectiveness of its policy interventions.

Unleashing a Blitz of Policy Support to Stabilize the Economy

China has unleashed a series of policy support measures to bolster its economy and restore investor confidence. These include plans for a stock stabilization fund, which aim to provide a safety net for the country's equity markets. The offshore yuan has risen as high as 6.9951 per dollar, extending a rebound of around 4% from a year-to-date low touched in July.The yuan's gains have been fueled by expectations that the Federal Reserve will further loosen its policy after delivering a half percentage point rate cut, which has kept the dollar near its lowest level since January. This has made the yuan more attractive to investors, leading to increased capital flows into China.

Converging with the Central Bank's Reference Rate

The need for the People's Bank of China (PBOC) to support the currency has also receded, as yuan levels have been converging with the central bank's daily reference rate. This suggests that bearish sentiment toward the currency is ebbing, and the PBOC is comfortable with the yuan's current trajectory.However, the central bank has cautioned against the building of one-sided expectations in the foreign exchange market and the risk of the yuan overshooting. PBOC Governor Pan Gongsheng reiterated that the yuan's exchange rate has a solid foundation to remain basically stable.

Potential Limits to Yuan Appreciation

While the yuan's gains may not be sustainable past the 7 per dollar level, analysts believe that further appreciation could be contingent on meaningful improvements in China's economic data and the property market. Ken Cheung, chief Asian FX strategist at Mizuho Bank, noted that the PBOC is aware of the risks of one-way yuan appreciation and is prepared to take measures to cool off the currency's appreciation bias if necessary.The recent surge in the yuan's value reflects the growing confidence in China's economic resilience and the effectiveness of its policy interventions. However, the central bank's cautious stance suggests that it will continue to monitor the currency's movements and take appropriate actions to maintain stability in the foreign exchange market.