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Caixin View: China Feels Chill From Trouble in Turkey

On Monday, the People’s Bank of China (PBOC) set the yuan's central parity rate at 6.8629 to the U.S. dollar, the weakest in nearly 15 months and 0.34% weaker than Friday’s fixing. Financial turmoil in Turkey, another country in the midst of a trade row with the U.S., is likely part of the reason for the PBOC’s decision.

The Turkish lira is plunging, putting more pressure on the euro and increasing investors’ risk aversion to emerging market currencies across the board. This is adding to the dollar’s attraction as traders seek a safe haven. And as we’ve argued before, a stronger dollar is one of the main reasons for the yuan's recent slide.

The lira lost over 17% of its value against the dollar last Friday, after U.S. President Donald Trump said he would double tariffs on Turkish exports of steel and aluminum. Risks may also be spilling over into Europe — last week the European Central Bank raised concerns about European banks’ balance sheet exposure to Turkey, according to a Financial Times report. The euro slipped against the dollar on Friday, and has continued to fall this week, hitting its weakest rate since July 2017 on Monday. The fall in lira is also souring sentiment toward other emerging market currencies: Russia’s ruble, South Africa’s rand, and Mexico’s peso all fell sharply on Friday and Monday as investors moved to safe-haven currencies like the dollar. The Dollar Index hit 96.48 on Monday, a 12-month high. Concerns over emerging-market currencies like the lira are certainly not the only reason for a rising dollar — strong U.S. growth in the first half, for instance, is providing much of the currency’s impetus — but they’re enough to shift exchange rates in the short term.

With the dollar likely to get even stronger in the near future, we think firm intervention from the PBOC to stop the yuan’s slide is coming soon. The central bank’s high tolerance level for a weaker yuan has surprised many — but this will likely come to an end as the currency edges ever closer to the 7-yuan-per-dollar range. The PBOC’s report second-quarter monetary policy implementation report released last Friday lends support to our forecast. The report said that when managing forex supply and demand, the PBOC will keep the “bottom line” in mind and “when necessary” resort to countercyclical adjustments. That was a change in wording from the first-quarter report which said that such adjustments, while previously in use, had become “neutral.” The report also said the bank would, during the internationalization of the renminbi, “continue to lay equal [our emphasis] stress on development, reform and guarding against risks.” This phrase was also not in the first-quarter report, which suggests to us that the PBOC is setting out the limitations of its tolerance.

We've already had a taste of the shift in the PBOC's attitude — on Aug. 3, it announced it would reimpose a requirement that financial institutions hold a 20% deposit at the central bank when they purchase foreign exchange forward contracts for clients, making it more expensive for speculators to bet on a decline in the yuan. More direct and effective measures, like using foreign exchange reserves to buy yuan, are probably likely soon.

Weekly Roundup

Macro & Finance

A multibillion-dollar credit-guarantee fund backed by China’s Ministry of Finance and state lenders was initiated as part of the country’s push to expand the availability of financing for small businesses.

Five government bodies, including the central bank and the top economic planning agency, issued a joint statement late Wednesday vowing to persist with efforts to reduce corporate leverage ratios this year as part of the government’s ongoing strategy to control financial risks in the economy.

Consumer prices in China rose at a faster pace in July due to larger increases in food and fuel prices, while factory inflation slipped, official data showed Thursday.

China returned fire Wednesday evening Beijing time with new tariffs on $16 billion of annual American imports shortly after the Trump administration unveiled its next round of tariffs on an equivalent amount of Chinese imports.

China booked its first half-year current account deficit in 20 years as spending on overseas services continued rising and outpaced income generated from the sale of goods by the world’s largest exporter.

The discipline inspection department of China’s insurance watchdog has been investigating nearly 40 insurance regulators since mid-July, fueling speculation that officials close to the former head of the agency are being targeted.

Companies

China Huarong Asset Management Co. Ltd., one of the nation’s “big four” state-owned bad-asset managers, whose former head is under investigation for what may be the country’s largest financial sector corruption case since 1949, has warned of a substantial profit decline in the first half of this year.

The jumbo jet that is HNA Group is making a U-turn on its soaring climb from regional air carrier to sprawling global conglomerate. Over the past weeks, HNA Group Co. Ltd. announced two mega deals to sell stakes in Radisson Hospitality Inc. and Avolon Holdings Ltd., an aircraft lessor it acquired in 2015.

The world’s largest initial public offering (IPO) in two years failed to excite the market, as shares for China Tower Corp. Ltd. ended their first day at HK$1.26 (16 U.S. cents) on Wednesday, unchanged from the offer price.

Alipay, China’s largest mobile payment provider, was fined 4.12 million yuan ($601,860) for violating payment rules, according to a regulatory filing Monday by the central bank’s Shanghai branch.

Calendar

August 14: The National Bureau of Statistics (NBS) releases industrial production and retail sales data for July, fixed-asset investment and real-estate investment and sales data for the January-July period, and the end-July surveyed urban unemployment rate

August 15: NBS releases July data on housing prices in 70 major cities

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