SHANGHAI • After a sharp sell-off, China's yuan and stock markets attempted a modest recovery yesterday, yet investors were grappling with some of their worst losses in years as a bitter Sino-US trade row threatened to ruffle the world's second-biggest economy.
The yuan was set for its biggest monthly fall on record. Chinese stocks, on a downward spiral since late January, had their biggest day of gains in almost two years but still notched their worst monthly slide since January 2016.
The mounting losses highlighted investors' anxiety as Washington and Beijing showed no signs of backing down from their tariff dispute.
The worry is that an extended sell-off in stocks and the yuan could spark a bout of capital outflows, putting further strain on the economy and complicating policymaking as the authorities put up defences against the trade battle with the United States.
The yuan has shed about 3.3 per cent of its value against the US dollar this month, its biggest fall since the market exchange rate was unified in 1994. It is off nearly 6 per cent from its peak in late March.
Yesterday, the yuan dipped to its lowest since mid-November last year, but recovered to 6.6246 per US dollar at official domestic close, roughly unchanged from the previous late night close.
Offshore, where the yuan trades more freely, the unit was weaker by about 0.02 per cent than the onshore spot, at 6.6260 per US dollar.
In equities, the benchmark CSI300 Index leapt 2.57 per cent, while the Shanghai Composite Index gained 2.2 per cent, though they were both down around 8 per cent for the month. In Hong Kong, the benchmark Hang Seng Index ended up 1.61 per cent.
President Donald Trump has shaken the world trade order by seeking to renegotiate the terms of some of the US' trading relationships, in particular with China.
The US is targeting US$34 billion (S$46 billion) of Chinese goods for tariffs to take effect on July 6, and has threatened tens of billions of dollars more for similar duties.
"The Chinese central bank is expected to step up efforts to calm investors and slow the pace of the yuan depreciation that has sparked risk aversion across regional markets," FX strategist Gao Qi at Scotiabank in Singapore wrote in a note yesterday. He expected "strong resistance" at 6.70 yuan per US dollar.
Mr Linus Yip, chief strategist at First Shanghai Securities, said the rebound in China and Hong Kong stocks was "technical", and the yuan's slide was hurting sentiment.
"Currency is the core, fundamental asset class. A weakening currency is a symptom of waning confidence and reduces risk appetite."
Some investors considered a tweak in wording in a report on the central bank's second-quarter monetary policy committee meeting, released on Thursday evening, as a sign that China's monetary stance might have switched.
The authorities had persistently vowed to keep the exchange rate "basically stable at a reasonable and balanced level", but this line disappeared from Thursday's statement.
Visiting economics scholar Deng Haiqing at Renmin University said the change of wording suggested monetary policy stance has been "changed rather than fine-tuned".
Policymakers were undoubtedly on guard for signs of a repeat of the 2015 rout in stock markets that was exacerbated by bungled rescue attempts.
Sectors and stocks that were exposed to the depreciating yuan have been hit hard this month.
Real estate was down more than 4 per cent. The transport sector index, whose components include many leading airlines, tumbled around 9 per cent this month, its steepest monthly drop since January 2016.
The yuan has held up against other emerging market currencies in the region as well as a basket of currencies the authorities use to measure its value.