Market Asks if Beijing Still Has a Red Line for the Yuan

In Business

The Chinese yuan is sinking toward a boundary that held even during severe capital outflows two years ago, reviving speculation about how much depreciation Beijing will tolerate.

Acrimony between the world’s two largest economies has sent the yuan to more than 14-month lows against the dollar. The long-running U.S.-China spat escalated this week when the Trump administration threatened to more than double proposed tariffs on Chinese imports, and Beijing warned of unspecified retaliation.

The slide has prompted market participants to question whether the yuan will weaken beyond 7 to the dollar, which it hasn’t breached in a decade. This week, economists at

Deutsche Bank

cut their yuan forecasts to 6.95 to the dollar by the end of this year and 7.4 by end-2019.

Some, such as Mizuho Bank and Pictet Wealth Management, say China could intervene to defend the 7 line in the short term.

In the tightly controlled domestic market, the yuan slumped as much as 1% Friday, hitting 6.8965 to the dollar before recovering somewhat. Offshore, it fell as far as 6.9109. In both markets, the yuan has now lost roughly 7% in less than two months. It is also approaching a record low against a basket of currencies of its trading partners, a system introduced in 2015.

Analysts and advisers to the Chinese government say it isn’t employing currency weakness as a trade weapon, but rather allowing a market-led softening at an orderly pace. Diverging monetary policy between the U.S. and China is also weighing on the currency.

For Beijing, it is a balancing act. Depreciation makes Chinese exports cheaper globally, offsetting the pain caused by U.S. tariffs, but also risks spooking citizens and companies into sending money abroad—possibly worsening the decline.

Deutsche Bank estimates that capital outflows increased to $34 billion in June—the most since November, though still far from the levels of late 2016, when outflows reached $90 billion a month.

On Friday, the offshore yuan fell further in late-afternoon trading in Hong Kong, as it has done in other sessions recently. That suggests the decline is being driven by foreign investors in other time zones, rather than by Chinese residents sending cash out, said Sven Schubert, a foreign-exchange strategist at Vontobel Asset Management in Zurich.

Regardless of who is behind the pressure, he expects Chinese authorities to step in and slow the move around 7 yuan per dollar. “There’s some self interest for China to stop the depreciation at some point,” he said.

However, Khoon Goh, head of Asia research at ANZ in Singapore, said Chinese authorities would focus on spillover effects, such as capital flight, rather than a particular exchange rate. “If the yuan breaks 7, maybe that could start to open the floodgates, but we just don’t know,” he said.

The consensus still favors stability. Investors using forward contracts, which allow two parties to swap currencies at a specific date and exchange rate, see the yuan at 6.86 to the dollar in five months’ time, according to Thomson Reuters data.

Write to Saumya Vaishampayan at [email protected]

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