Illustration: Tang Tengfei/GT

The rapid appreciation of the yuan has garnered significant attention in the financial markets, igniting speculation regarding the currency's upward trajectory and its potential implications. However, rather than focusing solely on the short-term fluctuations of the exchange rate, investors are advised to pay more attention to the long-term steady trend of the yuan's value and the stable economic development in China that underpins its value.

The offshore yuan on Wednesday strengthened briefly to 6.9942 against the US dollar, rallying past the 7 per dollar milestone for the first time since May 2023. So far, the offshore yuan against the dollar has extended a rebound of nearly 4 percent from a year-to-date low touched in July, while the onshore yuan has strengthened about 3.5 percent against the dollar during the same period.

The relatively strong performance of the yuan has generated a wave of optimism regarding its potential appreciation, a sentiment that is certainly understandable given the current economic climate. 

Fluctuations in the yuan's exchange rate are influenced by a myriad of factors, including the international political and economic landscape, shifting market expectations, and the intricacies of monetary policy. This interplay of variables introduces a significant degree of uncertainty in a currency's short-term fluctuations.

In particular, the US Federal Reserve's recent interest rate cut alleviated external pressure on the yuan's exchange rate. As market sentiment surrounding the Fed's potential for further rate cuts has gained traction and begun to materialize, the US Dollar Index has experienced a continuous decline since August, falling by about 3 percent. 

This decline has, in turn, mitigated the depreciation pressures faced by non-US currencies, including the yuan. During this period, it is normal to see fluctuations in the yuan's exchange rate against the dollar. 

The long-term trend of the yuan's exchange rate remaining basically stable should be apparent, so there is no need to overinterpret short-term fluctuations. 

Fundamentally speaking, the yuan's exchange rate is determined by economic fundamentals. China's central bank, top securities regulator and financial regulator on Tuesday announced at a press conference a raft of monetary stimulus, property market support and capital market strengthening measures to boost the country's high-quality economic development.

These moves included cutting the reserve requirement ratio by 0.5 percentage points in the near future, lowering rates on existing home loans, and the creation of a swap program for securities, funds and insurance companies to obtain liquidity.

The introduction of these economic stimulus policies plays a crucial role in stabilizing domestic economic development. In light of rising global economic uncertainty, ensuring the stable development of the Chinese economy has become increasingly significant. 

Furthermore, the demonstration of China's ability to sustain steady economic growth bolsters domestic confidence and also provides robust support for the stability of the yuan's exchange rate.

From the policy perspective, the People's Bank of China's stance on the exchange rate is clear and transparent. 

First, the central bank insists on the decisive role of the market in exchange rate formation and maintains exchange rate flexibility. 

Second, it aims to strengthen guidance to prevent the foreign exchange market from forming one-sided expectations, so as to maintain the basic stability of the yuan's exchange rate at a reasonable and equilibrium level. 

Foreign trade is also an important support for the stability of the yuan rate.

This is because the stability of the yuan's exchange rate is crucial for the healthy development of the economy, as it influences not only trade dynamics but also the stability of financial markets and the confidence of international investors. 

Consequently, maintaining a stable yuan exchange rate is a fundamental aspect of China's monetary policy and an essential prerequisite for ensuring domestic economic stability.

Therefore, the underlying fundamentals of the Chinese economy, coupled with the policy stance of the central bank, provide robust support for the general stability of the yuan's exchange rate in the long run. Market participants are advised to closely follow evolving policy trends and economic fundamentals, which will be instrumental in shaping reasonable expectations about the currency.