BEIJING • China's yuan hit a fresh 10-year low against the US currency yesterday, pushed lower by worries about slower growth in the domestic economy and a sharp escalation in the US-China trade war.
The Chinese currency has weakened about 9 per cent over the past six months, moving closer to the seven-per-US-dollar level, which was last seen during the 2008 global financial crisis. The recent steep decline has shifted market focus to the question of whether China will defend the psychologically important level, and to what extent it would do so.
"If the authorities are mindful of the potential impact on sentiment and capital flows, they have to gauge the potential negative impact on sentiment and overshooting beyond seven if the level is broken," said Ms Frances Cheung, head of Asia macro strategy at Westpac in Singapore. She expects the Chinese central bank may want to slow any downside moves and said it was uncertain in the longer term if there were any particular levels at which the yuan would be defended at all cost beyond this.
Before market opening, the People's Bank of China (PBOC) set its official yuan mid-point at 6.9574 per dollar, 0.28 per cent weaker than the previous fix of 6.9377.
Yesterday's fixing was the lowest guidance since May 21, 2008. The lower fix came as the dollar firmed against its rivals, supported by a safe haven bid amid fresh US-China trade worries.
Bloomberg reported that the United States was preparing to announce tariffs on all remaining Chinese imports by early December if talks next month between presidents Donald Trump and Xi Jinping falter. But Mr Trump contradicted that, saying the US could get a "great" deal on trade with China.
"The news that the US is threatening a new round of tariffs has weighed on market sentiment, but I don't know how to define a meeting as a 'failure'," Mr Zhou Hao, senior emerging market economist at Commerzbank in Singapore, said of the planned Trump-Xi meeting. "So the market is just testing the bottom line of the PBOC, and the PBOC is still passively defending its currency."
In the spot market, the onshore yuan opened at 6.9600 per dollar. As of midday, the onshore yuan was changing hands at 6.9688, 0.16 per cent softer than the mid-point. Its offshore counterpart traded at 6.9739 at midday.
Three traders said major state-owned Chinese banks were seen swapping yuan for dollars in forwards in morning trade. Two traders said they suspected the state-run banks were stockpiling dollars for future use. China's biggest state-owned banks are widely believed to often act on behalf of the PBOC in the forex market.
The PBOC allows the exchange rate to rise or fall 2 per cent from the official mid-point rate it sets each morning.