Yuan weakens further despite efforts by People’s Bank of China to stabilise exchange rate

Currency had already hit a five-month low against the US dollar on Monday

PUBLISHED : Tuesday, 19 June, 2018, 9:21pm
UPDATED : Tuesday, 19 June, 2018, 10:53pm

The yuan continued to weaken on Tuesday, after China’s central bank raised the daily fixing rate amid heightened worries about the China-US trade dispute. The People’s Bank of China set the daily midpoint rate at 6.4235 against the US dollar, up 71 basis points after the Chinese currency hit a five-month low on Monday.

The currency closed at 6.4743 against the US dollar on Tuesday, down 0.56 per cent from Monday, hitting its lowest level since January 11. Monday’s close of 6.4378 against the US dollar was already its lowest since January 12.

Mounting worries about an escalating trade war between China and the US resulted in the yuan’s further depreciation
Bob Zhou, chief executive, Yinshu Capital

“Mounting worries about an escalating trade war between China and the US resulted in the yuan’s further depreciation,” said Bob Zhou, chief executive of financial services company Yinshu Capital. “The central bank might step in to intervene if the sell-off turns out to be out of control.”

US President Donald Trump on Monday threatened to slap a punitive tariff of 10 per cent on another US$200 billion worth of Chinese imports. The new tariffs are on top of a 25 per cent levy on Chinese imports announced on Friday that will take effect on July 6.

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Theoretically, a dwindling trade surplus leads to a weaker local currency. And a weaker yuan can make Chinese exports competitive overseas, but the Chinese central bank apparently does not want to see a sharp devaluation of the yuan at present.

Traders are allowed to trade up to 2 per cent on either side of the daily reference rate set by the PBOC.

A higher midpoint rate by the central bank on Tuesday showed Beijing was trying to stabilise the exchange rate.

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On the mainland, turbulence in the capital and money markets is seen as a serious issue that can cause social disorder.

On Tuesday, the benchmark Shanghai Composite Index dived by 3.8 per cent, as worsening China-US trade relations triggered panic selling, which led to about 1,000 stocks tumbling to the 10 per cent daily trading limit.

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Beijing has promised to retaliate if the US decides to impose the additional tariffs.

Unlike onshore currency trading, whose rate fluctuates in a range strictly defined by the PBOC, offshore traded yuan moves a bit more freely. The offshore yuan traded at 6.4795 against the US dollar on Tuesday, 0.8 per cent cheaper than its onshore counterpart.