Caixin
Jul 20, 2018 04:18 AM
ECONOMY

Yuan Hits One-Year Low Amid Concerns Over Trade, Liquidity

The yuan has slid more than 4% since mid-June. Photo: VCG
The yuan has slid more than 4% since mid-June. Photo: VCG

China’s currency continued weakening this week and hit its lowest level in a year Thursday as escalating trade tensions between China and the U.S. eroded market sentiment. Investors are also betting on monetary easing.

The central bank set the yuan’s daily reference rate against the dollar Thursday at 6.7066, 0.23% weaker than the previous fix. It was the first time since August 2017 that the rate fell below the psychologically important level of 6.70 per dollar. The central bank allows the currency to fluctuate as much as 2% above or below that level onshore.

The onshore spot yuan dropped 0.6% during the day to close at 6.7734, the lowest since July 14, 2017.

The Chinese currency weakened even more in offshore markets. Yuan traded by international investors fell to over 6.80 per dollar Thursday afternoon Beijing time. The currency later bounced back slightly but remained volatile. The currency has slid more than 4% since mid-June, according to Bloomberg data.

Pacific Investment Management Co. said recently that Chinese authorities will be more tolerant of higher volatility and further weakening of the yuan. UBS this week revised its projection for the yuan to 6.8 per dollar by the end of this year from previous forecast of 6.3.

Despite the currency’s volatility, China’s foreign exchange regulator said Thursday that the country’s capital outflows have remained stable.

“The currency market has become more volatile since June 25, but data such as individual foreign exchange settlement and non-banking sector capital flows indicated that the capital outflow pressures are far less than 2015 and 2016,” said a spokeswoman for the State Administration of Foreign Exchange at a Thursday media briefing.

The gap between onshore and offshore values of the yuan reflected greater concerns among foreign traders amid the country’s worsening trade conflict with the U.S. following tit-for-tat tariffs.

The U.S. threatened to slap a fresh 10% tariff on $200 billion of Chinese goods on July 10 after it unleashed a 25% tariff on $34 billion of Chinese products.

Analysts have widely expected that China would weaken the yuan to offset the impact of the U.S. tariffs. But the central bank has reiterated that it would keep the yuan stable.

Investor sentiment is also driven by speculation that China will move toward monetary easing amid mounting concerns over tightening domestic liquidity that has squeezed business.

The China Banking and Insurance Regulatory Commission issued guidelines Wednesday requiring large and medium-sized commercial banks to expand the supply of credit to help small and private companies obtain funding.

The central bank also took measures to boost liquidity in the bond market, Caixin learned. The central bank will issue new medium-term lending facility loans to commercial banks that purchase nonfinancial corporate bonds this month, particularly bonds with lower ratings, sources said.

The incentive signals that the central bank believes the market for corporate bonds with lower ratings needs liquidity, an experienced bond investor said.

The moves sparked expectations that the monetary authority is moving closer to a Chinese version of quantitative easing policies as the economy shows signs of further slowing.

Wang Tao, head of China economic research at UBS, predicted that China’s central bank will further lower reserve requirement ratios for banks this year to free more capital in the banking system. China lowered some banks' reserve requirement ratios July 5 by 50 basis points, following an earlier cut in April. A basis point is 0.01 percentage point.

Growth of China’s economy decelerated to 6.7% year-on-year in the second quarter from 6.8% in the previous quarter. Meanwhile, companies, especially private ones, have suffered from a liquidity crunch amid the national deleveraging campaign.

From January to early June, 13 companies defaulted (link in Chinese) on 20 corporate bonds with a combined face value of 14.2 billion yuan ($2.11 billion), according to a report by China Central Depository & Clearing Co. Ltd., a state-owned company that provides depository and clearing services for the domestic bond market. That was more than half the value of bonds in default over the whole of 2017.

Contact reporter Han Wei (weihan@caixin.com)

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