(Yicai Global) Sept. 20 -- The recent rally of the yuan is close to its end, and a rebound on the dollar index could affect the redback negatively in the future, Shengzu Wang, co-head at Goldman Sachs Group’s [NYSE:GS] Investment Strategy Group Asia, said in an interview with Yicai Global.
The 10-percent slump in the dollar seen in the first half was a key driver of the yuan’s gain. Other drivers include increasingly stable economic growth in China, which led to a recovery in market confidence, and the introduction of the counter-cyclical factor to the yuan’s central parity pricing mechanism, which helped reverse the devaluation expectations among market participants.
The yuan’s value may now have already reached a peak from a short-term perspective, Wang said.
Exchange rates of the yuan are expected to remain stable going forward but may slip if the dollar index spikes, he added. “Regulators will be happy to see two-way fluctuations in exchange rates, rather than one-way devaluation or appreciation.”
China will maintain its current monetary policy, and market liquidity will remain “neutral and tight” in the next several months.
“A loose monetary policy can’t reduce financial leverage. It could cause a buildup of financial risks in certain sectors and companies, leading to detrimental effects on the economy in the long run,” Wang said. “The central bank will raise short-end interest rates while making sure that long-term rates stay stable and a substantial liquidity gap is avoided.”
Economic growth will slow in the second half, but the full-year growth rate will meet the 6.5-to-7-percent target set by the government, he added.
This is in line with the country’s economic transition, shifting away from the old extensive growth model reliant on investment and exports, toward a new one that is driven by consumption and services, he said.Keywords: Goldman Sachs, Currency market, monetary policy, Economic Growth Rates