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Aug 5, 2019
Business News: China lets yuan break key 7 level for first time in decade as trade...
Andrew Galbraith
6-7 minutes
SHANGHAI
(Reuters) - China let the yuan breach the key 7-per-dollar level on
Monday for the first time in more than a decade, in a sign Beijing might
be willing to tolerate more currency weakness that could further
inflame a trade conflict with the United States.
The sharp 1.4%
drop in the yuan comes days after U.S. President Donald Trump stunned
financial markets by vowing to impose 10% tariffs on the remaining $300
billion of Chinese imports from Sept. 1, abruptly breaking a brief
ceasefire in a bruising trade war that has disrupted global supply
chains and slowed growth.
Some analysts said the yuan move could unleash a dangerous new front in the trade hostilities - a currency war.
The
People’s Bank of China (PBOC) provided the early impetus for yuan bears
by setting a daily rate for the currency at its weakest level in eight
months.
Capital Economics Senior China Economist
Julian Evans-Pritchard said the PBOC had probably been holding back
against allowing a weaker yuan to avoid derailing trade negotiations
with the United States.
“The fact that they have now stopped
defending 7.00 against the dollar suggests that they have all but
abandoned hopes for a trade deal with the U.S.,” he said.
The PBOC gave few clues about its intentions.
In
a statement on Monday, the central bank linked the yuan’s weakness to
the fallout from the trade war, but said it would not change its
currency policy and that two-way fluctuations in the yuan’s value are
normal.
“Under the influence of factors including unilateralism,
protectionist trade measures, and expectations of tariffs against China,
the yuan has depreciated against the dollar today, breaking through 7
yuan per dollar,” the PBOC said.
The central bank set the yuan's daily midpoint CNY=PBOC at 6.9225 per dollar before the market open, its weakest level since Dec. 3, 2018.
“Today’s fixing was the last line in the sand,” said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong.
“The PBOC has fully given the green light to yuan depreciation.”
The onshore yuan CNY=CFXS
finished the domestic session at 7.0352 per dollar, its weakest level
since March 2008. Monday marked the first time the yuan had breached the
7-per-dollar level since May 9, 2008.
A
man sits in front of a board showing market information at a securities
brokerage house in Beijing, China August 5, 2019. REUTERS/Thomas Peter
With
the escalating trade war giving Beijing fewer reasons to maintain yuan
stability, analysts said they expect the currency to continue to weaken.
“In the short-term, the yuan’s strength would be largely
determined by the domestic economy. If third-quarter economic growth
stabilizes, the yuan could stabilize around 7.2 or 7.3 level,” said
Zhang Yi, chief economist at Zhonghai Shengrong Capital Management in
Beijing.
The yuan's weakness against the dollar was not confined to the onshore market. The offshore yuan CNH=D3 also slumped, hitting a record low against the dollar of 7.1094 before rebounding to 7.0815 by 0834 GMT.
YUAN AS TRADE WEAPON?
Monday’s
slump past the 7-per-dollar level could further intensify the economic
conflict between the United States and China. Trump has long been
critical of Beijing for manipulating its currency to gain a trade
advantage, and further yuan weakness could draw Washington’s wrath.
Capital
Economics’ Evans-Pritchard believes Trump is likely to be angered by
the PBOC’s explicit linking of Monday’s yuan weakness to the renewed
tariff threat.
Indeed, the flare-up in trade tensions has renewed
global financial market concerns over how much China will allow the
yuan to weaken to offset heavier pressure on its exporters.
“It
appears the Chinese authorities no longer see the need to limit the
tools at their disposal and that the currency is now also considered
part of the arsenal to be drawn upon,” Rob Carnell, chief economist and
head of research, Asia Pacific at ING, said in a note.
Analysts have previously said that authorities will keep depreciation in
check due to concerns about potential capital outflows.
Despite
slowing economic growth over the past year amid the intensifying trade
war, China has not seen a rush of capital flight, thanks to capital
controls put in place during the last economic downturn and growing
foreign inflows into Chinese stocks and bonds.
Slideshow (2 Images)
In
2015, China stunned global financial markets by devaluing the yuan 2%
as its economy slowed. It burned through $1 trillion in foreign exchange
reserves to steady it.
Shares were also battered on Monday, with
plummeting Hong Kong equities weighing on the overall market, said
Gerry Alfonso, director at Shenwan Hongyuan Securities Co.
HONG KONG DRAGS
Hong Kong's Hang Seng index .HSI
dived 2.9% to close at its lowest level since January as the city faced
major disruptions, with a general strike paralyzing parts of the Asian
financial center.
The yuan weakness added to the pressure.
Chinese companies listed in the city have their earnings and assets
denominated in yuan but share prices quoted in Hong Kong dollars HKD=D3.
“Yuan
depreciation has a greater impact on the Hong Kong market than
A-shares,” said Patrick Yiu, managing director at Hong Kong-based CASH
Asset Management.
The benchmark Shanghai Composite Index .SSEC lost 1.62% for its weakest close since Feb. 22, and the blue-chip index dropped 1.91%.
Airlines were particularly hard-hit, pulling a transport sub-index down 2.72%.
Highlighting
the widening impact of the trade tensions, agricultural commodities’
prices surged after a report that China had asked state-owned firms to
halt imports of U.S. agricultural products.
China soymeal
futures rose more than 2% and Dalian iron ore futures dropped, hitting
their weakest level since July, while London copper slumped to its
lowest in over two years.
Reporting by Andrew Galbraith and
Winni Zhou in SHANGHAI and Noah Sin in HONG KONG; Additional reporting
by Luoyan Liu in SHANGHAI and Stella Qiu in BEIJING; Editing by Shri
Navaratnam
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