China’s yuan drops to a decade-low, 7 per dollar now in sight

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By Bloomberg News

China’s yuan slid to the weakest level since May 2008, moving closer to the key level of 7 per dollar, as the central bank cut its daily fixing and on signs that a trade war with the US may escalate.

The currency declined as much as 0.15% to 6.9724 per dollar in Shanghai, within 0.5% of 7 – a level hasn’t been reached since the global financial crisis. That came after the People’s Bank of China weakened its daily reference rate, which restricts the onshore yuan’s moves by 2% on either side, to the lowest in more than a decade.

Bloomberg News reported that the US is preparing to announce by early December tariffs on all remaining Chinese imports if talks next month between presidents Donald Trump and Xi Jinping fail to ease the tensions. Trump told Fox News a deal with China has to be “great” because the Asian nation has “drained” the US, while he doesn’t think China is “ready” yet.

“Depreciation pressures are intensifying,” said Gao Qi, a currency strategist at Scotiabank in Singapore. “The yuan won’t slide to 7 a dollar before Xi and Trump meets. But if that meeting fails to improve the China and U.S. relations, a drop to 7 will likely be inevitable.”

The onshore yuan fell 0.07% to 6.9671 per dollar as of 11:32 in Shanghai, while the offshore rate gained 0.05%. Bloomberg Dollar Spot Index on Monday surged by the most in eight weeks.

The Chinese currency has tumbled about 9% over the past six months, stoking a debate on whether or when it will slide to 7 a dollar. Such a move is unlikely as China’s international balance of payments remains sound and monetary authorities are determined to stabilise the market, according to a front-page commentary on the Xinhua News Agency’s Economic Information Daily on Tuesday.

At a briefing in Beijing on Friday, PBOC Deputy Governor Pan Gongsheng said the central bank will take macro-prudential measures to stabilise expectations in the foreign-exchange market, and that it is confident the yuan will be kept basically stable at reasonable levels.

The yuan has come under renewed pressure of late, as the PBOC cut its reserve-ratio requirement for a fourth time this year and the yield spread between Chinese and US government bonds hovers near the tightest since April 2011. Risks of capital outflows are emerging, with onshore demand for foreign-exchange surging in September to the highest since late 2016.

“The authorities are likely to take a more stern line if it approaches the 7 level,” said Khoon Goh, head of research at Australia and New Zealand Banking Group in Singapore.

“A breach of 7 could intensify depreciation expectations, and cause renewed capital outflow pressures, which will be destabilizing for domestic financial markets.”