China's yuan firms despite weaker mid-point, but downward pressure builds

China's yuan strengthened against the dollar on Friday despite a weaker mid-point set by the central bank, as some analysts expected the Chinese economy to withstand the fallout from the Omicron variant better than its peers.

The yuan opened at 6.3771 per dollar and was changing hands at 6.3718 at midday, stronger than the previous late session close.

The strength comes even after the People's Bank of China set the midpoint rate at 6.3738 per dollar prior to market open, weaker than the previous fix of 6.3719.

But banks polled by Reuters expected the yuan to decline against the greenback next year as the world's second-largest economy slows due to slowing exports and a sluggish property market, with the yield spread between Chinese and U.S. bonds expected to narrow as monetary policies diverge.

The yuan has remained strong even as the dollar index has been supported by expectations of U.S. monetary tightening, with the local currency bolstered by robust capital inflows and dollar-selling by Chinese exporters.

Not only is China better protected against the new variant due to its tight border controls and zero-tolerance coronavirus policy, some economists say, but its exports could benefit if the situation triggers factory closures in other countries, as happened last year.

"China's zero Covid strategy, replete with travel restrictions and widespread testing, means that reduced vaccine efficacy to Omicron is not necessarily a big worry for the Chinese," DBS Group wrote in a research note.

But the yuan is expected to lose 1.5% against the greenback over the next year as the economy is widely expected to grow at a much weaker pace in 2022, according to a Reuters poll.

Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.5357, 2.48% weaker than Friday's midpoint.