Foreign exchange Photo:Xinhua

China's foreign exchange market has a sound foundation for smooth operation despite recent gains of the US dollar versus the yuan, a Chinese government official told an economic forum on Thursday.

The yuan is softening because of the rise of the US Dollar Index. On Tuesday, the central parity rate of the yuan against the dollar was 7.107, according to the China Foreign Exchange Trade System, the lowest rate since October 10, 2022.

Speaking at the 14th Lujiazui Forum in Shanghai, Pan Gongsheng, deputy governor of the People's Bank of China, the central bank, said that the yuan's volatility reflected various internal and external factors, including the US Federal Reserve's aggressive interest rate hikes since March 2022.

Another factor is that the basis for the domestic economic recovery is not yet solid, Pan said.

Although there have been fluctuations in the yuan's exchange rate, the forex market has operated smoothly, Pan noted, adding that exchange rate market expectations and China's cross-border capital flows have remained relatively stable.

"Over the years, we have accumulated a lot of experience in dealing with external shocks, and we have more macro-prudential policy tools to manage the foreign exchange market," Pan said, noting that the government has the confidence and capability to maintain the stable operation of the country's forex market.

The stable operation of China's foreign exchange market has a good foundation because China's economy generally maintains a stable upward trend, Pan said. His remarks are backed up by the positive outlook of international financial institutions for the Chinese economy in 2023.

In April, the IMF raised its forecast for China's GDP growth this year from 4.4 percent to 5.2 percent. The World Bank released its latest global economic outlook, raising the forecast for China's economic growth from 4.3 percent to 5.6 percent this year.

"These increased expectations are sending a very important signal for a stronger yuan ... although the yuan depreciated against the dollar recently, this won't last long," Li Changan, a professor at the Academy of China Open Economy Studies of the University of International Business and Economics, told the Global Times on Thursday.

Moreover, with the US Fed's interest rate hike cycle expected to end, it is difficult for the dollar to continue to strengthen in value, experts said.

China's financial market liquidity is reasonably sufficient, providing adequate and stable financing for the real economy, according to Pan.

China has sought to maintain a stable foreign currency market. Measures such as the greater use of exchange rate hedging tools and the substantial increase in the level of cross-border use of the yuan have been adopted, which have significantly reduced exchange rate risks.

China's long-term adherence to a prudent monetary policy is in stark contrast with the "aggressive" US monetary policy, experts say.

In the long term, the yuan's exchange rate will be stable since China's economy is on an upswing trend, while the US dollar is likely to weaken due to elevated inflation and a possible recession faced by the US economy, an economic expert told the Global Times on Thursday.