China's onshore and offshore yuan strengthened against the U.S. dollar on Monday, rising above the psychological threshold of 7 per U.S. dollar for the first time since mid-September.

Experts said the U.S. dollar rally may be reaching its peak, and the implementation of China's policies to stabilize economic growth, the real estate sector and market expectations will restore market confidence and support the strengthening of the yuan.

A report from the BOC Research Institute said the Chinese currency has the foundation to stabilize gradually in 2023. As the U.S. inflation has shown signs of cooling down, the U.S. Federal Reserve's recent monetary policy tightening trend may also slow down. This will marginally reduce the yuan depreciation pressure.

A series of favorable policies in China, including optimization of COVID-19 prevention and control measures, will promote the further stabilization of the Chinese economy, the report said.

At the same time, downward pressure on the global economy will increase next year for reasons like continuous high inflation in the United States and Europe. As a result, an expected uptick in Chinese economic growth and a global economic downturn will support steady recovery of the yuan, the report said.

As China keeps optimizing its COVID-19 prevention and control measures and implementing policies to stabilize the housing market, investor outlook for the Chinese economy is becoming more positive, said Zhou Maohua, an analyst at China Everbright Bank.

In addition, the market expects that the U.S. Fed is coming to the end of its rate hike cycle and will slow down the pace of rate increases. This has led to a recent decline in the U.S. dollar, Zhou said.

Uncertainties will likely continue to shroud the yuan-dollar exchange rate in the next few months. The trend will depend on the pace of rate hikes by the Fed and the market judgment on the performance of other major currencies, said Wang Tao, chief China economist at UBS.

Given the hopes that the COVID-19 situation will get better next year and the Chinese economy is likely to open up further, the yuan is expected to appreciate against the U.S. dollar in the second half of next year, said Wang while addressing the 19th International Finance Forum Annual Meeting held last week in Guangzhou, Guangdong province.

Zhong Zhengsheng, chief economist at Ping An Securities, told the same forum that China's economic performance would improve, thus giving strong support to the yuan, if three conditions are met: the COVID-19 situation turns out to be better than expected next year; compensatory consumption also proves higher than the anticipated level; and growth stabilization policies maintain continuity and consistency.

Continuous optimization of COVID-19 control measures since mid-November is conducive to the improvement of consumption, a resurgence of domestic demand and economic recovery. Moreover, a series of real estate policies introduced recently will help mitigate risks associated with the housing sector and stabilize the housing market, said Chang Ran, a senior researcher at the Zhixin Investment Research Institute.

As market expectations for the Chinese economy are improving, international investors have increased their holdings of yuan-denominated assets since November. The expected improvement of the Chinese economy and enhanced attraction of yuan-denominated assets have given support to the yuan exchange rate, Chang said.

She forecast that the yuan exchange rate will display two-way fluctuations within a certain range and is likely to appreciate slightly against the U.S. dollar in 2023.

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