(Yicai Global) Sept. 1 -- With the US dollar continuing to strengthen, the Chinese yuan recently dropped below 6.9 to the greenback. It will likely fall below 7, but return to the current level by the end of this year, according to a senior economist at Swiss banking giant UBS.

That means the risk of further yuan depreciation is still under control, Wang Tao, head of Asia Economic Research and chief Chinese economist at UBS, told Yicai Global recently.

Though interest rates on the long-term US government bonds exceed that of China, there is no need to overly worry about the risk of yuan depreciation, she pointed out, because China still has a very significant trade surplus and the ability to control capital outflows.

The yuan has weakened against the dollar, but has strengthened versus the euro and the Japanese yen, Wang noted. “The yuan’s depreciation within a controllable range will boost exports amid heavy economic downward pressure.”

The onshore yuan closed at 6.8990 against the dollar today, up 85 basis points, while the offshore yuan was 6.9034 as of 6.25 p.m. with a drop of 95 bps. The redback has depreciated more than 8 percent against the US currency so far this year, as the US Federal Reserve continues to ratchet up interest rates.

UBS’s growth forecast for China’s gross domestic product this year remains at 3 percent, Wang said. With the Covid-19 situation easing and more stimulus policies introduced, China’s economy is likely to improve significantly in the second half of the year from the second quarter, but some policy effects may be delayed until the fourth quarter, she added.

China still has room to execute more policies, such as cutting the loan prime rate further to boost the recovery of the real estate sector, and will keep expanding its investment in infrastructure at a high rate of 10 percent to 12 percent this half, Wang predicted.

The National Interbank Funding Center announced on Aug. 22 a 5 bips cut to the one-year LPR to 3.65 percent, with the five-year LPR lowered 15 bips to 4.3 percent. It was the third time this year that the LPR had been cut, and the three reductions have brought the one-year rate down by 15 bips and five-year rate by 35 bips.

Editors: Dou Shicong, Peter Thomas