Yuan stabilizes, remains strong currency

Chinese currency has been stable against the U.S. dollar for a week, suggesting the market has calmed down after last week's jolting depreciation.

The yuan central parity rate against the U.S. dollar strengthened by 3 basis points to 6.3963 on Wednesday.

Over the last week, the spot USD/CNY exchange rate has hovered at around 6.39, three percent higher than before the central bank's reforms on the yuan's central parity rate last Tuesday, which devalued the yuan by two percent.

The move sparked a sell-off as traders worried about whether the central bank would allow the yuan to fall even further.

In response to worries, the bank signaled a three-percent decline would put the currency at a reasonable level and denied claims that the depreciation was to counter a slump in exports.

The market steadied in the last week.

"The fast depreciation is over," said Wang Han, an analyst at Industrial Securities. "Stabilizing will be the main theme."

Wang said the central bank would keep the yuan stable at its current level to soothe market expectations.

With the central parity rate reform helping the yuan better reflect market consensus and the three-percent depreciation easing downturn pressure, the stabilized yuan may help investors regain their interest in China-related products. Chinese yuan remains strong at a time when the euro, yen and many emerging economy currencies have registered huge declines against the U.S. dollar.

According to the Bank for International Settlements, since 2014 the yuan has appreciated 10.28 percent in the nominal effective exchange rate and 9.54 percent in the real effective exchange rate, so even three percent down, the yuan is more attractive than many other Asian currencies.

Ding Shuang, chief China economist at Standard Chartered, said the yuan would continue climbing in real effective exchange rate as the U.S. dollar extends its rise.

"But the yuan's rise will not be as significant as it was before," Ding said.

Ding estimated the USD/CNY exchange would hit 6.5 by the end of 2015 but fall back to 6.35 by the end of 2016, as the U.S. dollar will not constantly remain strong.

The People's Bank of China (PBOC) said last Thursday that there are no grounds for persistent and substantial depreciation of the yuan in the long run while vowing to step in to prevent excessive swings.

"Chinese yuan is still a strong currency," said Zhang Xiaohui, PBOC assistant governor.

She said China's huge current account surplus, robust economic growth and abundant foreign exchange reserves would maintain the yuan's strength in the long term.

Analysts also believe that as China is promoting international use of the yuan, the regulator will keep yuan strong for global appeal.

"Investors will restore confidence in the stabilized yuan," said Xie Yaxuan, head of macro research at China Merchants Securities. "There will be no significant capital outflow."

Xie said foreign investors might have higher interest in yuan-denominated assets after the depreciation.

Moody's said the shift in the exchange rate management is a credit positive step as it supports the authorities' objectives of capital account liberalization and increased currency flexibility.

The rating agency believes significant depreciation of the yuan is unlikely, given China's robust fundamental factors.