Yuan strengthens to a 4-month high on optimism over prospects of China’s post-Covid economic recovery

China’s yuan hit a more than four-month high against the dollar on the first trading day of the year on Tuesday, underpinned by investor optimism that domestic economic recovery could set in earlier than expected.

The yuan’s strength comes after the currency weakened 7.9 per cent against the US dollar in 2022, its biggest annual drop since 1994, to reflect a buoyant greenback amid US rate hikes and an economic slowdown at home due to strict Covid-19 curbs.

Some people in Chinese cities have returned to regular activity this week and market participants have also gradually recovered from Covid infections and gone back to trading floors, currency traders said, noting trading activities were more active than at the end of last year.

Analysts at Barclays said “the accelerated reopening and likely earlier arrival of herd immunity suggests the initial reopening disruption to the economy has likely been brought forward and growth likely bottomed in the fourth quarter and should gradually recover in the first half.”

They, however, cautioned that a complete return to normal life may take several months. The analysts noted that China could face another crucial reopening test in January-February when the traditional Lunar New Year travel rush will take place. The week-long holiday starts on January 21 this year.

A vast majority of investors and analysts had projected that China would not announce reopening of its border and the economy before the annual parliamentary gathering in March. But a sudden dismantling of its Covid prevention protocols in December has caused spikes in infections across the country.