(Yicai Global) Jan. 20 -- The Chinese yuan versus US dollar exchange rate will most probably remain between 6.5 and 6.8 this year as the US economy recovers, despite gaining almost 10 percent since the end of May last year, the director of the Institute of International Trade under the country’s Ministry of Commerce said in an exclusive interview with Yicai Global.

In the short run, the movement of the exchange rate will depend on the next economic policy adopted by the US, Liang Ming said. The yuan will not appreciate sharply in the long term, he added.

The strengthening of the yuan last year was mainly against the greenback. Its exchange rate against a basket of currencies was relatively stable, he added. The onshore yuan-dollar exchange rate today was 6.4663 at 6 p.m. China time.

The rapid recovery of the Chinese economy post-Covid-19 and the country’s larger-than-expected trade surplus together with global concerns about the US’ long-term growth have helped drive the yuan up, he said.

Strong short-term risk aversion has also helped boost market demand for the redback. Foreign buyers tend to hold more yuan as they anticipate its appreciation. We also cannot ignore market hedging factors, especially some irrational hedging sentiments, including the inflow of international hot money and the impact of the herd effect, Liang said.

The yuan-dollar exchange rate may strengthen to 6.2 in the short term, according to some analysts, Liang said. But once Joe Biden takes office as US President on Jan. 20 the US economy should gradually return to normal as this will change the current weakness of the dollar.

Should the new administration support some long-term economic policies, there may be a rebound of the dollar. In which case, we will need to be on high alert for a sudden return of dollar funds. Should safe-haven funds leave on a large scale in a short period, it will have a great impact on China's currency market, stock market and yuan exchange rate, he added.

Impact on Exports

Historical experience shows that a one percentage point depreciation or appreciation of the yuan can affect China’s exports by only about 0.05 percentage points, Liang said.

If a large number of imported parts are required for the manufacture of a certain export product, the effect will be positive when the yuan appreciates. But it will undoubtedly be negative for the export of labor-intensive domestic products with meager profit margins, Liang said.

Companies can still avoid most of the risks resulting from exchange rate fluctuations by using five hedging tools. These include forward foreign exchange settlement, which is not expensive and is widely adopted, and cross-border yuan payments, which the Chinese government is promoting vigorously, Liang said.

Frequent and unclear exchange rate fluctuations can have a great impact on the operations of export companies. Foreign trade firms need to adapt constantly to changes and select foreign exchange hedging tools suitable for their business, Liang said.

Editors: Tang Shihua, Kim Taylor