Chinese one-hundred yuan banknotes are arranged for a photograph in Seoul, South Korea. (Photographer: SeongJoon Cho/Bloomberg)

China Won’t Weaponize the Yuan in Trade War, PBOC Official Says

(Bloomberg) -- Chinese central bankers vowed to keep their nation’s currency stable and to not deploy it as a weapon in the trade conflict with the U.S., helping the yuan reverse some of its recent plunge.

People’s Bank of China Governor Yi Gang said China will "keep the yuan exchange rate basically stable at reasonable and balanced level," a repetition of standard language that helped stoke speculation that policy makers are prepared to take tougher actions to arrest the plunge in the currency.

China Won’t Weaponize the Yuan in Trade War, PBOC Official Says

Later Tuesday, Sun Guofeng, head of the central bank’s financial research institute, said that the currency’s decline isn’t the result of China deliberately weakening it to gain an advantage over the U.S.

"Recently the yuan’s exchange rate has shown some weakness. This is entirely due to changes in market expectations as external uncertainties rise rather than intended guidance of the central bank, ” Sun said in exclusive comments provided to Bloomberg News. “China upholds multilateralism, globalization, free trade and rule-based international guidelines, and will not make the yuan’s exchange rate a tool to cope with trade conflicts.”

The yuan is the worst performing currency in Asia over the past three weeks, losing 3.7 percent against the dollar as the domestic economy slows and the nation slides closer to a trade war with the U.S. A failure to contain the tumble will feed speculation that officials are effectively depreciating the currency to defend against the effects of trade tariffs. The yuan erased losses to advance in onshore and overseas markets after Yi’s comments.

“The PBOC is sending a verbal warning and intervention that the recent slump in the yuan was too quick,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “In the short term, the yuan could strengthen as traders take profit from the recent slide. But if the market ignores the PBOC and keeps pushing the yuan weaker quickly, the central bank may conduct heavy intervention to send a stronger signal.”

China Won’t Weaponize the Yuan in Trade War, PBOC Official Says

While there were no heavy-handed actions in the market, there were some signs of mild, suspected intervention during morning trading on Tuesday. Some major Chinese banks sold the dollar after the yuan slid past 6.7 per greenback, a move that strengthened the currency above that level, according to four traders who asked not to be named.

"The market sentiment is very one-sided, all the hedging and trading flows are all pointing to further weakening of the yuan," said Ryan Lam, head of research at Shanghai Commercial Bank Ltd. "The yuan is going through a very bad cycle now."

Sound Fundamentals

China’s economic fundamentals are sound and financial risks are controllable, Yi said, adding that the nation must stick with its foreign-exchange policy of "managing a floating currency exchange rate mechanism, which is based on market supply and demand and with reference to the basket of currencies." The central bank will maintain a prudent, neutral policy stance, he said.

What Our Economists Say..

“It’s not clear if the PBOC is now drawing a line in the sand at 6.7, or simply signaling a willingness to do more to lean against currency weakness,” wrote Tom Orlik and Fielding Chen at Bloomberg Economics. “What does appear clear is that ‘managed’ is coming back into the yuan’s ‘managed float.”

Policy makers are "confident" that the yuan can be kept basically steady, PBOC Deputy Governor Pan Gongsheng said at a conference in Hong Kong on Tuesday. The nation’s balance of payments are generally balanced, and it has plenty of foreign reserves, rich experience and plenty of policy tools, he added.

The onshore yuan rallied 0.24 percent to 6.6500 per dollar as of 4:52 p.m. in Shanghai on Tuesday, after posting its worst monthly plunge since 1994 in June. The currency traded overseas was 0.39 percent stronger. The Bloomberg replica of the CFETS RMB Index, which tracks the yuan against 24 peers, fell for a 10th straight day, to 95.1.

"The central bank is ready to use stronger measures to turn the market trend, as further sharp depreciation of the yuan would drive the market to panic while the stock sentiment has already been poor," said Tommy Xie, economist from Oversea-Chinese Banking Corp Ltd. "Further weakness will be limited as the market is concerned about potential PBOC intervention."

To contact Bloomberg News staff for this story: Xiaoqing Pi in Beijing at xpi1@bloomberg.net;Yinan Zhao in Beijing at yzhao300@bloomberg.net;Tian Chen in Hong Kong at tchen259@bloomberg.net;Miao Han in Beijing at mhan22@bloomberg.net;Heng Xie in Beijing at hxie34@bloomberg.net

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With assistance from Editorial Board