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US trade representative Robert Lighthizer(left) and US Treasury secretary Steven Mnuchin (right) with China's Commerce Minister Zhong Shan during October’s trade talks in Washington. Photo: Bloomberg

China takes further steps to stabilise yuan to aid trade war deal with US$4.3 billion bill sale in Hong Kong

  • Efforts by China to stabilise the yuan exchange rate may facilitate the signing of a phase one trade deal the United States, analysts say
  • China will sell a total of 30 billion yuan (US$4.3 billion) in yuan-denominated securities in Hong Kong on Thursday

China’s steps to stabilise the yuan exchange rate against the US dollar could facilitate the signing of a phase one trade deal with the United States, having already raised the outlook for the Chinese currency.

The latest move, announced on Friday by the People’s Bank of China (PBOC), will see a total of 30 billion yuan (US$4.3 billion) in yuan-denominated securities sold in Hong Kong next week. This a widely used method to push up investors’ borrowing costs, making it more expensive for speculators to bet that the yuan will fall.

The auction on Thursday will include 20 billion yuan (US$2.8 billion) of three month securities and 10 billion yuan (US$1.4 of one-year securities.

The announcement came just ahead of a planned phone call between the top US and Chinese trade negotiators later on Friday to continue efforts to finalise the details of the interim trade pact. Among other things, the two sides are likely to discuss a new venue for the signing of the deal after the sudden cancellation of the Asia-Pacific Economic Cooperation meeting in Chile disrupted the previous arrangement for Chinese President Xi Jinping and his US counterpart Donald Trump to meet on November 17.

One provision expected to be included in the pact would formalise the previous commitments by China and the US not to devalue their currencies for commercial advantage. China’s recent steps to stabilise the yuan suggest it is already seeking to abide by the terms of that prevision and improve the chances for agreement on other provisions.

Final agreement on an interim trade deal containing the currency provision would improve the outlook for the US to rescind its designation of China as a currency manipulator, which was added in early August after China let the yuan-US dollar exchange rate breach the key threshold of 7 for the first time in a decade.

Zhou Hao, a senior economist at Commerzbank in Singapore, said market sentiment on the yuan had improved, resulting in a repositioning of its outlook.

“The fear of a rapid yuan depreciation is gone,” he said. “Instead, there is a likelihood that the yuan will strengthen towards 7 once a deal is announced.”

The fear of a rapid yuan depreciation is gone. Instead, there is a likelihood that the yuan will strengthen towards 7 once a deal is announced
Zhou Hao

The yuan was trading at 7.0387 to the US dollar in Asian trade by midafternoon on Friday.

Beijing may repledge to avoid a competitive devaluation and market intervention, but it would be hard to push up the exchange rate significantly owing to continuing Chinese capital outflow pressure, Zhou added.

“An annual two-way fluctuation of 3 to 5 per cent could be acceptable [to Chinese authorities]”, he predicted.

The PBOC set the midpoint of the yuan’s daily allowed trading range at 7.0437 per US dollar on Friday compared to 7.0883 two months ago. The yuan rose 1.5 per cent against the US dollar in October, but is still down 2.3 per cent so far this year.

Serena Zhou, an economist at Mizuho Securities in Hong Kong, said the sale of securities in Hong Kong is one of the tools the PBOC uses to stabilise the currency, in addition to the use of its countercyclical factor in calculating the daily trading range midpoint and official comments to manage market expectation. However, the central bank have largely abandoned direct market intervention to manage the exchange rate in recent years.

Zhou estimated that the yuan would likely rise to a level close to 7 against US dollar by the end of this year, supported by the currency provision in the expected phase one trade deal.

“[However] Beijing is unlikely to allow a large appreciation as demanded by Washington, due to its fear over the [adverse economic impact that the] 1985 Plaza Accord imposed on Japan,” she said. “They could just agree on more fair and transparent market operations.”

The 1985 Plaza Accord saw Japan, France, Germany, Britain and the US push down the value of the US dollar, resulting in the Japanese yen doubling in value. That rise has been cited as one of the chief reasons for the bursting of Japan's property market bubble and subsequent decades of economic stagnation.

Hong Kong is the main offshore trading centre for the Chinese currency, with deposits of more than 600 billion yuan (US$85 billion).

The central bank has already sold securities in Hong Kong nine times so far this year, with strong particularly among commercial banks, mutual funds, foreign central banks and international financial organisations. The six-month bills sold at a rate of 2.89 per cent in September were 3.6 times oversubscribed.

Chinese officials have been largely tight-lipped about the currency provisions in the trade deal and the outlook for the yuan.

Addressing the autumn meeting of the International Monetary Fund four days after China-US talks in Washington in mid-October, central bank governor Yi Gang said the yuan exchange rate remained broadly stable and that there is growing market acceptance of two-way exchange rate fluctuations.

“Judging both from economic fundamentals and from market supply and demand, the [yuan] exchange rate is at an appropriate level,” he said.

The US Treasury, which accused China of “taking concrete steps to devalue its currency” and so “gaining an unfair competitive advantage in international trade” in August, is due to release its semi-annual foreign exchange report, which will give more clues over the progress of bilateral currency negotiations and whether the currency manipulator label will be removed.

This article appeared in the South China Morning Post print edition as: Yuan steps may aid signing of trade deal
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