FACTBOX-Global banks split on Chinese yuan outlook after breaking key 7 mark

SHANGHAI, Jan 9 (Reuters) - Major global investment houses hold divergent views on the Chinese yuan after its breach of the psychologically important 7-per-dollar level at the end of last year, though most expect its strength to persist into the new year.

China's yuan CNY=CFXS strengthened 4.5% against the dollar last year, snapping three consecutive years of losses and marking the best annual performance since 2020.

While the Chinese currency largely faced depreciation pressure in recent years, prompting authorities to guard against capital outflow risks, the central bank also signalled reluctance toward overly rapid gains.

Here is a summary of some forecasts for the Chinese currency:

The average year-end forecast from the four investment banks showed that yuan will trade at 6.9875 per dollar, almost unchanged current level of 6.9825 on Friday.

An earlier version of the forecasts published in early December showed that investment banks expect the yuan to rise past the key 7 level in 2026.

KEY QUOTES:

STANDARD CHARTERED

"The pace of appreciation is likely to slow in H1 given the turn in seasonality and the state media's warnings against the 'one-way appreciation bet'. However, fundamental drivers – including likely continued strong exports, a narrowing USD versus CNY interest rate gap, and renewed Renminbi internationalisation efforts – should support a stronger CNY versus USD this year."

BARCLAYS

"A stronger currency is not a panacea for China's economy or a means to end deflation. It could exacerbate deflationary pressures via lower import costs – albeit amid overall lower import demand – even as it reduces some of the deflationary impulse externally, via higher export prices.

"We doubt that a stronger CNY would help boost aggregate spending. Instead, what China needs, in our view, is stronger stimulus measures aimed at households to boost aggregate demand."

MORGAN STANLEY

"We think a stronger currency will be the result of economic rebalancing and reflation through structural reforms and housing market stabilization - rather than the cause.

"When the economy is still grappling with deflationary pressures, a rapid currency appreciation could be counterproductive. It could weaken the nominal income base of the tradable sector and reinforce subdued price expectations by lowering import prices further. As such, engineering a strong currency prematurely may hinder, rather than help, the rebalancing process."

GOLDMAN SACHS

"We see broad USD weakness and year-end FX settlement demand as key drivers behind the move. Looking ahead, we still expect a gradual and choppy CNY appreciation path, with the USD leg remaining the key driver.

"Solid export growth, significant FX undervaluation, and a softer USD should support a faster decline in USD/CNY than that implied by FX forwards. Recent policy communications signal a preference for a measured pace of appreciation."