The yuan is likely to appreciate to around 6.8 against the US dollar in three months, and is expected to rise to around 6.0 in three years.
The yuan is expected to go up against the US dollar in the long run because the growth of China's economy, especially total factor productivity (TFP), is faster than the US. There is no shortage of evidences both in theory and practice showing that when a country's TFP grows more quickly, its currency will remain stronger. Although China's technical level hasn't reached the US', it is rising faster.
In 2013, the yuan went up to around 6.1 to 6.2 against the US dollar, which indicates that there will be no problem for it to reach 6.0 again.
In the short term, the yuan will reach a level of 6.8. China and the US have agreed on the terms of a phase one trade deal, significantly boosting market confidence.
It was the uncertainty brought by the bruising trade war that undermined markets' confidence in the Chinese economy and the yuan previously. Since interim progress has been made in trade talks, foreign investors will pick up confidence and invest in China, driving the yuan up.
China's central bank's monetary policies in 2020 are also expected to be conducive for the yuan to go up. The annual Central Economic Working Conference in December has made it clear that the country will adopt a prudent monetary policy to stabilize growth. Under such a policy orientation, liquidity in the market is set to remain ample, which will also support the yuan.
However, this doesn't mean that investors can just put one-way bets on the yuan to go up. The yuan will see upward tendency in the next three years, but in the medium term, the bi-directional volatility of the yuan will also become more active.
The uptrend of the yuan generally is not conducive for exports, but will benefit imports. Given that China is now promoting imports, domestic importers are set to benefit, while consumers will also enjoy better quality imported goods and services.
For the domestic production side, the promotion of intermediate goods can effectively improve companies' TFP. Better overseas products and services will also push domestic companies to join competition and promote industry upgrade.
In summary, a stronger yuan represents the world's level of confidence in the Chinese economy. It is China's good economic fundamentals that are determining the yuan's uptrend both in the short and long term.
From: Global Times