(Yicai Global) Sept. 2 -- The Chinese yuan has strengthened 5 percent against the US dollar since the end of May, driven by China’s V-shaped economic recovery and the large differential in China-US interest rates. However, analysts disagree on whether this trend is sustainable in the mid-to-long term.

The China-US interest rate differential, or the disparity in interest rates between China and US, serves as a solid foundation for a strong yuan, Eric Robertsen, Standard Chartered’s global head of research, told Yicai Global.

The difference between the recent yield rates of the two countries’ 10-year treasury bonds is nearly 250 basis points. The US has no interest rate advantages among most G10 currencies and its fiscal situation is deteriorating, he added.

The dollar is likely to depreciate at least another 5 percent to the low it hit in 2018, Robertsen said. The dollar index has fallen nearly 10 percent since late March.

The exchange rate of the yuan has been slipping against the dollar for the past five years, dropping around 10 percent in total, said Gao Shanwen, chief economist of Essence Securities. It has now spilled into mid-to-long-term oversold territory and is likely to begin long-term appreciation soon.

Once this happens, yuan-denominated assets will start to become more attractive, he added. This will significantly raise the proportion of yuan-denominated assets in international investors' asset allocation and provide a new driving force for the yuan to go strong, Gao said.

China's exports have started to rise against the general downward trend and the dollar index is depreciating, all of which provide fundamental support for the mid-to-long-term strengthening of the yuan, he added.

"China's export industry is expected to continue to recover in the third quarter and will drive the country’s gross domestic product back up to 5.6 percent in the fourth quarter with an annual growth rate of 2.5 percent," said Wu Xianghong, senior economist at J.P. Morgan Chase China.

China’s current strong recovery might not continue in the future as government support policies fade out, said Zhou Hao, senior economist of emerging markets at Germany’s Commerzbank. The yuan is still under pressure from external uncertainties, so the yuan is likely to drop under pressure in the mid-term, he added.

Editors: Tang Shihua, Kim Taylor