Yuan’s Review In 2017 And Top Drivers In 2018

Talking Points:

The Chinese Yuan gained over 7% against the Dollar in 2017; it approached major resistance levels at the year end.

High-quality of growth will be China’s major theme in 2018; prudent monetary policy will continue to apply.

Curbing financial risks will be PBOC’ primary target in 2018; other risks are seen in trade and financial opening up.

A Review for the Yuan in 2017

The offshore Chinese Yuan (CNH) gained +7.3% against the U.S. Dollar in 2017 and the onshore Yuan rose +7.0%. Dollar weakness, Chinese regulator’s guidance, as well as China’s on-target growth have all contributed to Yuan’s advance.

USD/CNH 1-Week

Yuan's Review in 2017 and Top Drivers in 2018

Chinese fundamentals set the foundation for a relatively stable Yuan. The country’s growth rate target was set to be around 6.5% in 2017. Despite of the 25+ year low level, the economy has avoided hard-landing and financial catastrophe and is expected to achieve the target or even beat it. Also, the PBOC has implemented a prudent monetary policy in 2017, which was tighter than in 2016.

Dollar’s weakness and PBOC’s guidance were the other top drivers. From January to May, the USD/CNH remained mostly in a range, despite that the Dollar weakened over the same span of time. This caused the Chinese regulator’s concern on a failing exchange rate regime. As a result, the PBOC introduced a counter-cycle factor in calculating Yuan’s daily reference rate. This is a major adjustment in Chinese exchange rate regime since the PBOC de-pegged the Chinese currency against the Dollar in August 2015.

Following this move, the Yuan restored momentum against the Dollar in the third quarter and hit the yearly-high level of 6.4433. In the last quarter, the Yuan pair entered a range, amid Dollar’s picking up and lack of domestic improvement. At the end of 2017, the USD/CNH fell to a long-term support zone (resistance for the Yuan).

Economic Growth Target: A Shift from Speed to Quality