SHANGHAI • China's central bank moved to calm jittery financial markets yesterday after the yuan fell through the psychologically significant 6.7 to the US dollar mark, hitting its lowest in almost a year as anxieties over US trade frictions deepened.
Stocks sank in morning trade as Beijing and Washington hurtled towards an end-of-week tariff deadline that has kept investors in China nervous, although they recouped their losses and ended the day in positive territory.
Chinese currency and equity markets have been on edge ahead of Friday, when US tariffs on US$34 billion (S$46.5 billion) worth of Chinese goods kick in. Beijing has said it would retaliate with tariffs on US products.
The sustained fall in stocks and the yuan appeared to be rattling the authorities.
In a statement on the website of the People's Bank of China (PBOC), Governor Yi Gang said the central bank was closely watching fluctuations in the foreign exchange market and would seek to keep the yuan at a stable and reasonable level.
Cross-border capital flows were under control, he added.
State-controlled media earlier called the fall in stocks an "irrational overreaction" and urged investors not to panic over the growing trade frictions.
After the morning drop, market participants suspected the central bank of intervening in the currency market to support the yuan.
The yuan fell to 6.7204 per US dollar, its weakest since last Aug 7, and the first time it has dropped below 6.7 since Aug 9, before crossing back and forth over the line.
"It's a crucial day for the yuan today given it weakened past 6.7 per dollar," said Mr Ken Cheung, a senior Asian FX strategist at Mizuho Bank in Hong Kong.
In August last year, 6.7 was the level around which the Chinese authorities relaxed restrictions on the yuan, a move that was followed by a gradual appreciation over the next eight months.
Four traders told Reuters that major state-owned banks were seen swapping yuan for dollars in the forwards market yesterday and immediately selling some of them into spot market, which helped support the Chinese unit.
"It feels like the state-owned banks are stocking up on bullets to prevent the yuan from falling too much," said one trader at a Chinese bank in Shanghai.
The central bank earlier set the midpoint at 6.6497 yuan per dollar, its weakest fixing in about 10 months.
Speaking in the morning at an event to mark the one-year anniversary of a scheme that links Hong Kong and mainland bond markets, PBOC deputy governor and head of the foreign exchange regulator Pan Gongsheng said China was confident it could keep the yuan basically stable and at a "reasonable" level.
Traders said statements from the PBOC officials went some way towards calming the market.
In equities, the blue chip CSI300 Index slumped by more than 2 per cent in the morning trading session, and the Shanghai Composite Index was down more than 1 per cent before staging an afternoon comeback. By the end of the day, the Shanghai Composite was up 0.4 per cent while the CSI300 had risen 0.04 per cent.
Hong Kong's Hang Seng Index was hammered after a one-day hiatus on Monday to mark the day that the former British colony was returned to China. It was down by around 3 per cent before clawing back some losses in the afternoon to close 1.4 per cent lower.