Offshore yuan drops faster than onshore currency as trade war fears, central bank policies spook international investors

The gap between the onshore and offshore yuan widened to 132 basis points on Friday, as the Chinese currency extended its losing streak against the US dollar to 12 days in a row – its longest losing period ever.

Both pools fell to their lowest level in seven months, but the offshore yuan – traded by international investors in Hong Kong – dropped more sharply than the onshore yuan, which is traded by mainland Chinese investors.

The sharper decline in the offshore yuan is a sign international investors are more gloomy about the outlook for the currency. The offshore yuan is trading weaker than the onshore yuan now, but before the currency started on its losing streak, the offshore yuan was trading stronger than the onshore yuan, and the spread between the two was only 68 basis points on June 13.

The losing streak and the widening of the spread started when the People’s Bank of China opted not to follow the US Federal Reserve in increasing interest rates on June 14. As a result, international traders started selling the yuan and buying the US dollar to enjoy a better interest rate.

“The People’s Bank of China has more control over the onshore yuan market, while the offshore yuan is traded outside the country and is more market driven. The offshore yuan market is, thus, falling more than the onshore yuan, as international traders are worried about the trade war [between the United States and China], and they believe Chinese central bank policies are set to led the yuan lower,” said Jasper Lo, chief investment strategist at Hong Kong-based Eddid Securities and Futures.

The offshore yuan traded at 6.6521 against the US dollar on Friday morning, down 0.33 per cent from Thursday and 4.1 per cent from June 13, before its losing streak began. The onshore yuan traded at 6.6389 per US dollar on Friday morning, down 0.23 from Thursday and 3.8 per cent from June 13.

By the afternoon, the offshore yuan had bounced back to 6.6223 per US dollar, while the onshore yuan rose to 6.6144.

“The PBOC on Sunday announced a cut in the reserve requirement ratio, injecting 700 billion yuan [US$106 billion] into the banking system. This has increased the liquidity of the mainland banking sector and, hence, dragged down the interbank interest rate in Shanghai. In addition, the central bank has set the yuan lower for an eighth straight day on Friday, which has also led international traders to sell the yuan in the offshore market,” he said.

Yuan falls for the 11th straight day as Chinese central bank girds itself for a trade war with the US

The Chinese central bank lowered the yuan’s daily midpoint fixing rate to 6.6166 per US dollar on Friday morning, down 0.3 per cent, or 206 basis points, from Thursday’s 6.5960. Over the past eight days, the PBOC has lowered the midpoint rate by a total of 3 per cent, a strong signal that it wants to weaken the yuan as it gears up for a possible all-out trade war with the US. A weaker yuan will help Chinese exporters.

The yuan’s price depends on a fixing rate set by the PBOC every morning, and traders can trade the currency in a range of 2 per cent on either side. The fixing rate is, therefore, seen by the market as a signal of the central bank’s strategy.

“The yuan can be a weapon in the trade war between the US and China. And unless US President Donald Trump and his government do not soften their trade tariff threats, the PBOC will not change its policy and is likely to continue to fix the yuan at a lower level,” said Lo.

“A weak yuan will help exports, but may led to capital outflows. However, since the mainland has added a lot of measures to curb capital outflows over the past two years, the government is less worried about a weaker yuan.”

Timeline: the yuan’s journey to being a truly global currency