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China guided Tuesday the yuan to its lowest official level in a decade, an initiative that could fuel hopes of a new self-reinforcing fall.
The depreciation of the yuan is putting pressure on Chinese decision-makers, who want to give investors a greater voice in determining the value of the currency, but seem uncomfortable with letting the yuan exceed the symbolic threshold of seven. dollars the dollar. The recent slide has rekindled speculation about the possibility of another weakness, likely to cause capital flight, which would exacerbate the weakness of the currency.
On Tuesday, the central bank set the dollar benchmark rate at 6,9574 yuan, putting the Chinese currency at its lowest level since May 2008. The yuan reached its lowest level in a decade when trade on the continent started 15 minutes later, a dollar buying up to 6.9724 yuan, according to Wind.
The yuan was affected this year by an economic slowdown, which could be aggravated by US tariffs on hundreds of billions of dollars worth of Chinese goods, as well as divergent perspectives on monetary policy in the two economies.
The People's Bank of China sets a daily benchmark for the dollar against the yuan in the domestic market and allows it to trade in a range around that level. The rate depends in part on where the currency pair closed yesterday and on day-to-day market movements. But the central bank also has some discretion, which allows it to minimize sharp fluctuations.
As the yuan approaches the seven dollar mark, the currency traders of the four largest Chinese banks as well as some government advisers believe that it is unlikely that the PBOC will allow this to happen without a fight.
Pan Gongsheng, a vice-governor of the central bank, warned investors on Friday not to bet on the currency. His comments led to a short-lived rebound in the yuan.
The central bank of China has in the past targeted bearish investors, or short sellers, by making foreign borrowing costs prohibitive for the yuan. He also resorted to direct intervention, drawing on his stock of foreign exchange reserves to defend the yuan in 2016.
So far this year, the central bank has largely refrained from supporting the currency by selling dollars and buying yuan. The Chinese authorities said this showed that Beijing was allowing markets to have more influence. But this also happens when a weaker yuan suits Beijing's interests, since a cheaper currency makes Chinese products more competitive abroad.
The rise of the yuan against the dollar this year is partly explained by the strength of the greenback: against a basket of 24 currencies, the yuan fell by only 2.7% this year, against 6.7% against the dollar.
Some analysts have become more gloomy in recent months. American banks, including
Bank of America
,
JP Morgan
and
Goldman Sachs
expect the yuan to depreciate beyond seven to one dollar in the coming months.
Similarly, the demand for options to protect against a weaker yuan in the coming month has recently reached one of the highest levels in the last two years, based on a measure called risk reversal, which compares prices put and call options.
Official data showed last week, Chinese commercial banks sold for $ 17.6 billion in net foreign currency in September, a record 15 months, which adds to the signs of increasing pressure exits of capital.
-Lingling Wei contributed to this article.
Write to Saumya Vaishampayan at [email protected] and Mike Bird at [email protected]
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