The cost to investors of protecting themselves from a falling Chinese yuan currency has reached its lowest level in seven years, as many see Beijing not allowing a sharp depreciation even as trade tensions increase. If they allowed a sharp fall in the currency, Chinese authorities would face capital outflows and further damage to the economy beyond that caused by trade tensions. As Beijing would not want this, investors see less need to buy offshore one-month forward yuan contracts, widely used to hedge against the onshore currency. “Even if Chinese policymakers see a weaker yuan as helpful to ease financial conditions and cushion a slowing economy when external demand faces new challenges, we do not believe it is in China’s interests to weaponise its currency,” said Claudio Piron, emerging Asia fixed income and currency strategist at Bank of America Merrill Lynch. Offshore yuan via one-month forward points dropped to 10 points early on Friday, marking the lowest level since October 2011 on an intra-day basis. It has retraced slightly to around 27.92 points thereafter. Yuan forward points are added to or subtracted from the spot rate, reflecting appreciation or depreciation expectations as well as interest rates compared to the US currency and interest rates. For Friday’s one-month yuan forward contract, with its spot price trading at 6.6461 plus 27.92, the forward rate would be 6.6433. The three-month yuan forward contract was at 150 points, down from an average of 326 points in the past year. In comparison, yuan forward points spiked to a high of 1,850 points in early 2016 due to the People’s Bank of China (PBOC) attempt to reform the exchange rate. Why China is unlikely to start a currency war amid escalating trade tension While spot yuan declined in the past month as well as in 2015-2016, the lower forward points indicate investors this time round see further depreciation to be moderate, with no sharp, one-off move. The yuan lost 3.28 per cent of its value against the US dollar in June, marking its biggest monthly decline since 1994, when China unified its market exchange rates. Ken Cheung Kin-tai, senior Asia forex strategist at Mizuho Bank, said the fall in forward yuan also reflected diverging monetary policies between China and the US. The decision last month by the PBOC to cut reserve requirement ratios to ensure ample liquidity in the banking system triggered expectations of narrowing interest-rate spreads between China and the US, causing yuan forward points to fall rapidly, Cheung said. Piron added that the PBOC would move its daily yuan fixing rates in line with broader US dollar movements. As such, he predicted the yuan would drop to 6.80 per dollar by the end 2018, a decline of 4.5 per cent for the year. “We believe [depreciation] will still be tolerable in the context of a US-China trade deal being hammered out and the US economy still growing close to 3 per cent,” Piron said.