Chinese yuan's strength expected to reverse in 2022, Fitch says

The yuan is expected to weaken in 2022 because of softer external demand for Chinese products and diverging monetary policies between China and the US that will support the dollar, Fitch Ratings said Tuesday.

The Chinese currency has gained steadily since its lowest level in May 2020 during the early months of the coronavirus pandemic, the global rating agency said in a statement.

The dollar against the yuan fell from 7.18 in May 2020 to 6.37 as of Tuesday, according to official figures.

"The yuan’s strength reflects strong export growth, which has pushed the current account, as a share of GDP, higher since the onset of the pandemic. A decline in overseas travel by Chinese residents has also boosted the services balance," said Fitch.

Two factors, however, point to a weakening yuan in the coming months, it added.

Fitch said China's current account surplus has started to narrow and it expects further reduction in the surplus as external demand for Chinese products soften.

In addition, "the diverging trend of monetary policy between the US and China will reduce the money-market interest-rate spread and build depreciation pressure on the yuan," it added.

The agency said it estimates the yuan to weaken to 6.7 against the dollar by the end of next year.