China's yuan exchange rate is set to weaken after a period of stability as the country gradually returns to work amid economic activity that has been severely dented by the coronavirus epidemic, analysts said.

The yuan has eased by 0.6 per cent against the US dollar this year, much less than the South Korean won's decline of 2 per cent and the Singapore dollar's drop of 3 per cent. The euro has tumbled by as much as 3.6 per cent.

While the Chinese currency was buoyed by the signing of a phase one trade deal between Beijing and Washington last month, its resilience is unlikely to continue, according to analysts.

Market optimism is gradually fading and the exchange rate faces greater volatility as China's workforce slowly returns to their jobs and normalise distortions caused by soft trading activity over the Lunar New Year holiday, said Zhou Hao, senior emerging market economist Asia at Commerzbank.

"The yuan is not reflecting a reasonable level now because of the impact from the holidays," he said. "There is debate on whether the yuan needs to catch up with the depreciation of other currencies. China's growth and the virus situation are all negative for the yuan."

Most provinces across China have returned to work after an extended holiday, but the economy is still far from returning to full speed as businesses must contend with wide-ranging containment measures, including transport restrictions, factory shutdowns and mandatory 14-day quarantine measures.

But it remains unclear when businesses and the finance sector would resume full operational capacity, said Jimmy Zhu, chief strategist at Fullerton Markets. Poor market activity in the foreign exchange rates meant the yuan had not been moving much, he added.

The yuan has not fallen below the 7 per dollar mark in the past month, but any clean break below the symbolic threshold could point to further downside toward 7.20 this year, Commerzbank's Zhou said.

The immediate impact the new coronavirus outbreak, which has killed more than 2,000 people and infected over 74,000 in China, is becoming increasingly clear for the economy and exchange rate as the virus saps productivity and demand.

"The top three reasons for extended business suspension are local authorities' requirement, firms' concerns about the coronavirus outbreak, and difficulty for employees to return to work," said Robin Xing Ziqiang, Morgan Stanley's chief China economist.

Production levels had only reached about 30-50 per cent of capacity last week, with a return to normal not expected until mid-late March, Xing said.

President Xi Jinping has played down the impact of the coronavirus outbreak on China's economy, saying it is a temporary blow and would not stop China from reaching its goal this year of doubling GDP from 2010.

However, China's central bank has started to provide policy support to mitigate the virus' effects, including pumping 1.2 trillion yuan (US$174 billion) into financial markets. Interest rate cuts are anticipated and local governments are expected to introduce targeted fiscal measures to support small and medium-sized enterprises.

Pictet Wealth Management has lowered China's growth forecast to 5.6 per cent from 5.9 per cent this year. Oxford Economics has revised down its estimate to 5.4 per cent from 6.0 per cent, while Moody's has cut its prediction to 5.2 per cent from 5.8 per cent.

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