China Draws Line in Sand for Yuan as Fix Stays Stronger Than 6.9

(Bloomberg) -- China’s line in the sand for the battered yuan seems to have appeared.

The People’s Bank of China has been keeping its daily fixing for the onshore yuan stronger than 6.9 a dollar, even though the spot rate has been closing weaker than that level. The official reference rate has been stronger than the projections of analysts and traders every day this week.

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The fixings, which provide a hint of Beijing’s stance on the yuan, come amid other signs the PBOC has seen enough depreciation. Central bank Deputy Governor Liu Guoqiang said in an interview with the state-backed Financial News published on Thursday that China is able to keep the exchange rate basically stable at a reasonable and equilibrium level. The government has ample policy tools to cope with fluctuations, he added.

That follows similar statements recently by state media outlets and officials. The central bank also said this week it would sell bills in Hong Kong soon, a move that would drain offshore liquidity and support the exchange rate.

"The PBOC hopes to stabilize the fixing at 6.9, which helps anchor market sentiment and ensures the spot rate doesn’t weaken too much," said Gao Qi, a currency strategist at Scotiabank in Singapore. "China won’t likely set the rate weaker than that level tomorrow either because then Asian markets would feel nervous and sell the yuan and other currencies."

The yuan has been battered due to trade tensions with the U.S., retreating 2.6% this month as one of the worst performers in the world. The slump is hurting China’s stock flows, with foreigners selling a record 50 billion yuan ($7.2 billion) of the nation’s equities so far this month.

Investors will be looking to next month’s Group of 20 meeting in Japan to see if presidents Xi Jinping and Donald Trump move toward ending their dispute, which now involves China’s tech firms. A meeting would bode well for the yuan, while a lack of further negotiations would push the currency weaker, according to Gao.

Tommy Xie, an economist at Oversea-Chinese Banking Corp., said China’s policy makers have made their stance on the yuan very clear.

"They want to slow the depreciation and control volatility," he said. "The PBOC has been following its usual script in managing the yuan, which is using strong fixings onshore and limiting liquidity in overseas markets. The authorities will crack down on capital outflows in a tougher way if the currency keeps sliding."

The central bank set its fixing at 6.8994 on Thursday, stronger than the average forecast of 6.9014 by 16 traders and analysts in a Bloomberg survey. The fixings limit the onshore yuan’s moves to 2% in either direction.

The yuan weakened 0.12% to 6.9148 as of 4:52 p.m. in Shanghai, in line for its fifth close weaker than the 6.9 level. The benchmark Shanghai Composite Index fell 1.4%.

--With assistance from Qizi Sun and James Mayger.

To contact the reporters on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net;Ran Li in Beijing at rli279@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Philip Glamann, David Watkins

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