Fitch Ratings believes the Chinese yuan will weaken in 2022 as softer external demand for Chinese products and a diverging trend of monetary policy stances between China and the US will support the US dollar against the yuan. According to Fitch Ratings, recent yuan strength has defied the wider trend of US dollar appreciation. The yuan has gained steadily since its low point reached in May 2020 in the early stages of Covid-19, while the CFETS index of the yuan’s trade-weighted exchange rate is at its highest since the index was launched in late-2015, it added. The rating agency said that Chinese policy-makers have been sounding increasingly uncomfortable with yuan appreciation. They have recently stepped up efforts to stem the trend, including a hike in the foreign-exchange reserve requirement ratio for commercial banks, and ramped up net purchases of FX by the PBoC in November. 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. However, two factors point to a weakening yuan in the coming months, it said. First, the current account surplus – which tends to lead movements in the yuan – has started to narrow. We expect further reduction in the surplus as external demand for Chinese products should soften. Second, 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. The spread has historically accounted relatively well for movements in the dollar-yuan exchange rate. We expect the PBoC to cut its de facto policy rate (the 1yr MLF rate) in March 2022 while the Fed will start hiking rates, said Fitch Ratings. “We expect the yuan to weaken to 6.7 against the dollar by end-2022, versus 6.37 currently,” it said.