(Yicai) Sept. 2 -- The Chinese yuan may strengthen past the critical 7-per-US dollar level by year-end, buoyed by a rally in domestic stock markets and sustained foreign capital inflows, according to analysts.

Experts believe the yuan’s momentum could be bolstered by a possible US Federal Reserve rate cut this month and signs of progress in China-US trade talks.

The offshore yuan strengthened to 7.1351 against the greenback yesterday, up 2.6 percent from a weak point recorded on April 1, when US tariff tensions intensified. Last week, it had already breached the 7.15 mark.

The yuan’s exchange rate is primarily driven by two factors: the current account surplus, which reflects strong exports and outbound investments, and capital inflows under the capital account, including foreign-funded projects and securities purchases.

Improving yuan expectations have prompted exporters to increase conversions of US dollars into yuan. In July, 54.9 percent of foreign exchange income was settled in yuan, up from 46.1 percent earlier in the year and marking the highest ratio since last September.

Yuan Could Strengthen Below 7 by Year-End

Goldman Sachs Group expects the yuan to strengthen further, projecting the exchange rate to drop to 7.1 within the next two months and potentially reach 7 by December.

UBS told Yicai that the yuan still has room to appreciate and could fall below 7 next year, forecasting a rate of 6.95 by September 2026. According to the Swiss investment bank, continued increases in exporters’ settlements and a pause in tariff adjustments between China and the US are helping to stabilize market sentiment and support the redback.

External factors are also playing a role. The anticipated Fed rate cut cycle, expected to begin this month, would narrow the US-China interest rate gap, weakening the US dollar against the yuan, UBS added.

Jerry Chen, senior analyst at Gain Capital Holdings, told Yicai that Federal Reserve Chair Jerome Powell has recently taken a more dovish tone. Fed Governor Christopher Waller also reiterated his support for a rate cut last week and suggested further cuts over the next three to six months. Analysts now see an 85 percent chance of a rate cut in September.

Stock Market Rally Adds Support

The yuan’s strength is also supported by bullish Chinese equities. The Shanghai Composite Index climbed to 3,888.60 on Aug. 26, the highest in a decade, while the Shenzhen Component Index surged to 12,857.16 intraday today, the strongest in three years.

Zhang Meng, macro and forex strategist at Barclays, told Yicai that the yuan’s central parity rate appreciated to 7.1030 on Aug. 29, the firmest level since last October. Zhang noted that rising purchases of Chinese stocks by hedge funds are also boosting the yuan.

An Yun, chief investment officer at Schroders Fund Management China, told Yicai that sectors such as new fields of consumption and exports are performing well, even though recent market liquidity has largely been driven by insurance funds and household savings reallocations.

Improved market performance may in turn spur consumption recovery, further enhancing investor confidence, An concluded.

Editor: Emmi Laine