CNY: Policymakers Guide Yuan to Gradual Appreciation – OCBC

OCBC analysts Shen Moxiong and Huang Guoqiang said Chinese policymakers are guiding the yuan to appreciate at a moderate pace while curbing the pace of appreciation through a larger fixing premium. USD/CNH is currently trading near 6.74342, approaching recent lows.

**Gradual appreciation path under policy guidance**

The analysts believe the recent yuan strength reflects policymakers' gradualist management approach of "crossing the river by feeling the stones." On one hand, they allow the exchange rate to reflect economic fundamentals, releasing room for moderate appreciation; on the other, they maintain a premium through fixing settings to avoid forming one-way rapid appreciation expectations. This two-way management aims to balance export competitiveness against exchange rate marketization reforms, preventing a repeat of Japan's post-Plaza Accord sharp appreciation that hit exports.

**Short-term trend vs. long-term valuation divergence persists**

Despite the yuan's notable appreciation over the past 15 months, debate over its long-term valuation has not subsided. OCBC strategist Christopher Wong said in an interview that U.S. Treasury Secretary Bessent's recent comment that "many believe the yuan is undervalued" points more to the yuan's long-term structural valuation level rather than short-term trends. From Washington's perspective, the yuan may still be considered undervalued relative to China's external balance of payments and trade fundamentals.

**Support from the yuan's internationalization process**

From a medium-to-long-term perspective, the yuan exchange rate is gaining support from the internationalization process. Analysts noted that U.S. dollar funding costs both onshore and offshore are expected to rise significantly over the coming decades, a trend that will gradually enhance the yuan's competitive position in cross-border transactions. As China's fixed income market continues to expand, demand from enterprises settling trade in yuan for short-term yuan instruments is also growing, providing additional demand-side support for the yuan exchange rate.