China's yuan skids to worst month ever to trade war threatens to knock economy

SHANGHAI (Reuters) – After a sustained sell-off, China's yuan and stock markets were rebounded on Friday, while investors were struggling with Sino-U.S. trade row is the world's second-biggest economy.

The CNY = CFXS Wines monthly fall on record. Chinese stocks, we have downward spiral since late January, had their biggest day of gains in almost two years but notched their worst monthly slide since January 2016.

of backing down from their tariff dispute.

The worry is that the future of capital can not be ignored in the face of capital outflows.

The yuan has shed about 3.3 percent of its value against the dollar in June, it's biggest fall since the market exchange rate was unified in 1994. It's about 6 percent from its peak in late March.

On Friday, the price of its lowest since mid-November 2017, but recovered to 6.6246 per dollar at the official close, roughly unchanged from the previous late night close.

Offshore, where the unit was less than 0.02 percent than the onshore spot, at 6.6260 per dollar.

In equities, the benchmark CSI300 Index .CSI300 leapt 2.57 percent, while the Shanghai Composite Index .SSEC gained 2.2 percent, though they were both down around 8 percent for the month. In Hong Kong, the Hang Seng Index benchmark .HSI ended up 1.61 percent.

For a interactive chart comparing Chinese world markets and y exchange rates versus other markets around the world, click: tmsnrt.rs/2Kff2Sx

U.S. President Donald Trump has shaken the world trade by seeking to renegotiate the terms of some of the United States' trading relationships, in particular with China.

The U.S. is targeting $ 34 trillion of Chinese goods for tariffs to take effect on July 6, and has spawned tens of billions of dollars more for similar duties.

Chinese 10-year treasury futures for CFTU8 delivery, the most traded contract, was up 0.34 percent. A fixed income portfolio manager said the sharp rise in liquidity.

CENBANK SUPPORT?

"The central bank is expected to step up efforts to calm investors and reduce the risk of depreciation," said Gao Qi, FX strategist, "with the possible reintroduction of the counter-cyclical factor. at Scotiabank in Singapore, wrote in a note on Friday.

He expected "strong resistance" at 6.70 yuan per dollar.

Linus Yip, chief strategist at First Shanghai Securities, said the rebound in China and Hong Kong stocks was "technical," and the yuan's slide was hurting sentiment.

"Currency is the core, fundamental asset class. A weakening currency is a symptom of waning confidence and reduces risk appetite. "

Some investors considered a word in a report on the central bank's second-quarter monetary policy committee meeting, released on Thursday evening, as a sign that China's monetary stance might have switched.

Authorities had persistently vowed to "stable stable at a reasonable and balanced level", but this line disappears from Thursday's statement.

Deng Haiqing, a visiting economics scholar at Renmin University, said "change rather than fine-tuned".

Policymakers were undoubtedly on guard for the signals of the 2015 stock markets that were exacerbated by bungled rescue attempts.

YUAN HIT

Sectors and stocks that were exposed to the depreciating yuan have been hit hard this month.

Real estate .CSI300REI was down more than 4 percent and had its fifth straight month of losses. The transport sector index .CSI300TRANS, whose components include many leading airlines, tumbled around 9 percent this month, its steepest monthly drop since January 2016.

Flag carrier Air China ( 601111.SS ) has slumped close to 20 percent this month, its fourth straight month of losses.

Traders said the People's Bank of China (PBOC) has set the agenda for the past, and has been trying to warn the market of making a "one-way bet" on depreciation.

A trader at a regional bank in Shanghai who has been reckoned with the "filtering" of the midpoint fixing, which is set by the central bank each morning, in an apparent bid to keep the yuan from falling too Sharply.

"It is too early to say whether the counter-cyclical factor has been revived," the trader said.

In May 2017, the PBOC added a secret "counter-cyclical factor" to its formula for calculating the midpoint, which helped put a floor under a falling yuan. It effectively removed the x-factor at the start of this year as the rebounded yuan.

The yuan has held up against other emerging market currencies in the region as well as a basket of currencies the authorities use to measure its value.

For graphic on Chinese yuan under pressure with US threatens market instability click reut.rs/2NaorZh

For graphic on China's main stock markets outperforming global peers to the downside as trade woes weigh click reut.rs/2Kz49qA