MNI INTERVIEW2: CNY Strengthens, Third Plenum To Detail Reform

China’s yuan will likely breach 7 to the dollar and possibly appreciate further in the second half of the year as a key policy conference delivers positive messages on reform and with the Federal Reserve likely to start cutting rates from June, a prominent policy advisor told MNI in an interview.

The first six months of 2024 should see choppy trade in the yuan, currently at about 7.17 to the greenback, with the dollar index remaining in a band of 98-102 before the Fed eases, and as investors await concrete commitments to policy support in China, said Zhang Ming, senior fellow and deputy director at the Institute of Finance and Banking at the Chinese Academy of Social Science.

But China’s currency could close the year at about 6.8-7.0, with the dollar index retreating to a range of 92-98 in the second half and U.S. Treasury yields slipping as low as 3.2%. The yen should also gain against the dollar, Zhang predicted. The wide gap between China and U.S economic expansion and narrower interest rate differential will support a stronger yuan against the dollar, he said. (See MNI Interview: Volatile Yuan Ahead As Uncertainty Dominates)

THIRD PLENUM

The advisor expected a positive signal for reform at the long-awaited Third Plenum of the CCP Central Committee, which is usually a five-yearly meeting and was supposed to be held last year, but will now likely occur sometime after the Two Sessions meetings in March.

The Plenum should reiterate economic reform, highlighting the importance of the private sector and stressing the need to build a unified domestic market to improve economic connection between regions of the country, Zhang said.

“Decisions for reform and relevant measures will help boost the confidence of entrepreneurs and consumers, shore up domestic demand, and, at the same time, increase the vitality of regional development,” he said, adding that equity markets would benefit from the improved sentiment.

The Shanghai Composite Index has decreased by 3.27% so far this year, after a fall of 3.7% in 2023 and 15% in 2022.

As a result, capital outflow pressures will ease significantly in 2024 thanks to a better performance by domestic financial markets, even though the current account surplus will decline as exports weaken, Zhang said.

Zhang also told MNI the People's Bank of China will further expand its targeted facilities, while Beijing will likely issues additional China Government Bonds later in the year. (See MNI INTERVIEW: PBOC To Boost Targeted Facilities - Advisor)