An employee arranges genuine bundles of Chinese one-hundred yuan banknotes. (Photographer: SeongJoon Cho/Bloomberg)

China's Yuan Sinks Past Key Level, Will Test PBOC's Resolve

(Bloomberg) -- Traders will be watching to see what Chinese policymakers do to defend the yuan after it tumbled past a key level against the dollar.

The yuan sank as much as 1.1 percent in overnight offshore trading to 6.7249, its biggest loss since January 2016, as a trade conflict with the U.S. worsened. When the Chinese currency last weakened past 6.7 earlier this month, central bankers vowed to keep it stable and not deploy it as a weapon in the dispute -- helping spur a rebound. On Thursday, the People’s Bank of China set the daily reference rate at 6.6726, stronger than estimates compiled by Bloomberg.

Rising tensions between the world’s two largest economies have weighed heavily on China’s financial markets, with the yuan sinking more than 4 percent in the past month and the Shanghai stock index falling to a two-year low. State media have been calling for calm, with the Xinhua News Agency saying recent moves in asset prices are within a controllable range.

“The fixing is likely to serve as the primary tool” for intervention now, said Gao Qi, currency strategist at Scotiabank in Singapore. If that doesn’t work, officials will likely provide verbal support to slow the pace of the drop to avoid panic, he said.

The yuan was 0.4 percent lower at 6.6999 at 10:38 a.m. in Beijing, stronger than the offshore rate of 6.7145. The Shanghai Composite Index was up 1.3 percent after tumbling 1.8 percent on Wednesday. The gauge has fallen more than 20 percent from this year’s high. Hong Kong’s Hang Seng Index added 0.3 percent.

“We’re seeing some technical rebound after the sharp drop yesterday, but when you look at things in detail, I don’t think the market fundamentals have changed,” said Ronald Wan, chief executive of Partners Capital International Ltd. “Sentiment is still negative among a lot of investors, and people are still very risk averse for the time being.”

Industrial & Commercial Bank of China Ltd. and Agricultural Bank of China Ltd. were the top two drivers of the Shanghai Composite’s gains, both advancing more than 2 percent. Wan said financial stocks were rising on expectations the government will inject liquidity to support the sector. Cnooc Ltd., PetroChina Co. and China Petroleum & Chemical Corp. were among the worst performers on the Hang Seng Index after oil slid 5 percent overnight. Airlines gained.

ZTE Soars

ZTE Corp. jumped as much as 24 percent in Hong Kong and by the 10 percent daily limit in Shenzhen after the company signed an agreement that will allow it to resume doing business with U.S. suppliers after making a $400 million escrow payment.

“The ZTE news sends a positive signal and fuels hopes that China and the U.S. will likely resolve their trade disputes through negotiations,” said Zhang Gang, Shanghai-based strategist with Central China Securities Co. “Some funds might have entered to bottom fish stocks after the panic selling yesterday.”

Trade Talks

China’s Vice Minister of Commerce Wang Shouwen on Wednesday stressed the importance of negotiating to find a solution to the trade conflict. The Trump administration on Tuesday released a proposed list of an additional $200 billion in Chinese goods to be hit with tariffs. China’s Commerce Ministry responded by saying the tariffs, which cover everything from refrigerators to handbags, are “totally unacceptable.”

“The tariffs won’t be implemented until after August and we might see more negotiations before the imposition,” Central China Securities’ Zhang said. “I don’t expect stocks to drop further in the near term, but they will likely trade rangebound.”

©2018 Bloomberg L.P.

With assistance from Editorial Board

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