China's Yuan Tumbles to Lowest Since January on Trade War Fear

(Bloomberg) -- China’s yuan slid to the weakest level since January, as investors confronted the impact of escalating trade war tensions and fresh signs of fragility in the economy.

The onshore yuan fell 0.6% -- extending its decline this week to 1.3% -- to 6.8208 per dollar as of 5:52 p.m. in Shanghai. The demand for bearish bets on the currency also climbed, as the offshore yuan’s three-month risk reversal spiked for a fifth session to the highest level since November.

The currency’s slump comes as U.S. President Donald Trump declared Chinese leaders “broke the deal” he was negotiating with them on trade. Those comments were made before talks that were already clouded by imminent tariff increases by the U.S. and China’s threat of retaliation. Adding to strains on sentiment, data released Thursday showed China’s credit growth slowed more than expected in April, underlining the fragile nature of the recovery in the economy.

“The near-term outlook is very dependent on the trade talks – the yuan can tumble to 6.9 if the negotiations go sour or rally to 6.7 if an agreement is reached,” said Gao Qi, a currency strategist at Scotiabank in Singapore.

China will not allow the currency to keep sliding, as that will pressure stocks further and trigger risks in the broader financial system, Gao said. The authorities could boost the yuan’s funding costs in the offshore market to stabilize the exchange rate if the currency falls to 6.9, he said.

China's Yuan Tumbles to Lowest Since January on Trade War Fear

Some Chinese banks made sporadic offers to sell the dollar when the yuan weakened past 6.82 in the afternoon, according to five traders, who asked not to be named because they aren’t authorized to speak to the media.

China’s Prop Desks Were Today’s Biggest Yuan Bears, Traders Say

Ken Cheung, a senior currency strategist at Mizuho Bank Ltd., said the market will be closely watching what Beijing does to stabilize the yuan.

"We reckon that the chance for U.S. tariff hikes has been increasing to more than a 50-50 case," Cheung said, adding the yuan will slide to 6.9 if China retaliates on tariffs.

DBS Bank Ltd. is more bearish, with strategist Philip Wee saying the yuan could weaken to 7.2 a dollar, if the U.S. levies a 25% tariff rate on $200 billion of Chinese exports. The currency may tumble all the way to 8.1 if the tariffs are implemented on the remaining $325 billion worth of Chinese goods, he wrote in a note.

Chinese shares also fell, with the Shanghai Composite Index sliding 1.5% to the lowest close since Feb. 22, and the SSE 50 Index of large enterprises retreating more than 1.7% for a second day. WuXi AppTec Co. and Wanhua Chemical Group Co. lost more than 5.3%.

The Hang Seng China Enterprises Index fell 2.3% to 10,845.06, closing below the 11,000 level for the first time in nearly three months. Air China Ltd. dropped 4.6% as one of the worst performers on the measure of offshore China stocks. China Eastern Airlines Corp. and China Southern Airlines Co. fell at least 4.9% in Hong Kong.

The nation’s sovereign bonds advanced on weaker risk appetite, pushing the 10-year yield down by 4 basis points to 3.31%.

©2019 Bloomberg L.P.