1st LD-Writethru-China Focus: Chinese yuan breaks 12-day losing streak

The central parity rate of the Chinese renminbi (the yuan) strengthened 206 basis points to 6.8779 against the U.S. dollar Tuesday, ending a 12-day losing streak.

As of Monday, the central parity of the yuan against the dollar weakened for the 12th day in a row, to 6.8985, the lowest in more than eight years, according to the China Foreign Exchange Trading System.

Tuesday's correction is in line with market expectations that a sharp, sustained yuan depreciation against the dollar is unlikely, given that the country enjoys solid economic fundamentals, a current account surplus and abundant forex reserves.

The yuan will stay stable against a basket of currencies, according to Lian Ping, chief economist with the Bank of Communications.

However, depreciation pressure on the yuan will not weaken against a strong dollar backed by heightened expectations of an interest rate hike and optimistic U.S. economic data, said Liu Dongliang, an analyst with China Merchants Bank.

Liu expects increased pressure from December this year to January 2017 when Chinese citizens purchase foreign currencies, especially U.S. dollars, for travels during the Spring Festival holiday starting from the end of January.

Although the yuan's exchange rate failed to pass the threshold of 6.9 against the U.S. dollar on Monday, it will not be long before the yuan falls below that level, according to Han Huishi, from the financial market department of China Construction Bank.

That said, it is not easy to forecast when the yuan's exchange rate level will bottom-out during this period of fluctuation, said Guan Tao, former head of the international payments department in the State Administration of Foreign Exchange.

Guan believes such fluctuations will move in line with economic fundamentals in the long run, that is, if the economy is strong and stable, the currency will be too.

In the short term, the dollar may see some corrections after its rapid upward movement due to profit taking and market digestion of a probable U.S. interest rate hike, according to Lian.

As long-term dollar strengthening will hurt U.S. exports and manufacturing, the dollar will gain at a milder pace next year, and its appreciation may not be sustainable, Lian said.

"The yuan's short-term fluctuation does not mean the authorities have given up currency management," Lian said, stressing that China still applies a "managed" floating exchange rate mechanism.

"The central bank may go with the tide for now and intervene only at the proper time," he said.

So far, the yuan is relatively stable against a basket of currencies despite continued drops against the U.S. dollar, said Jing Ulrich, managing director and vice chair of Asia Pacific at JPMorgan Chase, at a press seminar in Beijing Monday.

Ulrich expects the yuan's depreciation pressure against the dollar to persist in the fourth quarter, while noting that uncertainties in global trade might not reverse China's steady growth as China pivots to the consumption and the service sectors.

Compared with the Chinese yuan, other currencies have weakened even more against the dollar. The yuan's market rate against the dollar weakened by 1.49 percent in October, but in the eurozone, Japan and Singapore, the weakening was 2.05 percent, 3.02 percent and 1.87 percent, respectively, according to China Foreign Exchange Trading System data.

In China's spot foreign exchange market, the yuan is allowed to rise or fall by 2 percent from the central parity rate each trading day.

The central parity rate of the yuan against the U.S. dollar is based on a weighted average of prices offered by market makers before the opening of the interbank market each business day. Endi