Yuan Weakens to 7-Month Low Despite China’s Move to Stem Decline

(Bloomberg) — The onshore yuan reopened from a holiday on the back foot, despite a move by China to slow its slide with a stronger-than-expected reference rate for the managed currency.

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The yuan slid 0.6% to a seven-month low of 7.2198 per dollar in Shanghai, as pessimism over the economic recovery and China’s policy divergence from peers continued to weigh on sentiment. The offshore yuan was little changed. The People’s Bank of China had sought to curb onshore currency weakness by setting its so-called fixing at the largest premium to estimates this year on Monday.

The move suggests the PBOC is growing increasingly uncomfortable with weakness in the yuan, the second worst performer in Asia in the past month. The offshore yuan slid to the lowest since November on Friday, amid disappointment from investors about China’s modest stimulus measures.

“It is possible for the yuan to weaken further in the near term as central banks of developed markets are more hawkish than expected and China growth recovery slower than expected, especially with the absence of stronger stimulus,” said Becky Liu, head of China macro strategy at Standard Chartered. “The yuan could fall to about 7.3 per dollar, but by the end of third or fourth quarter, we see room for it to stabilize and regain some ground.”

Optimism that authorities would be more proactive in supporting growth after the PBOC lowered a string of policy rates were dashed last week after mainland banks only reduced a key lending benchmark by a moderate amount, a move that sent the yuan and stocks tumbling. The daily fixing limits the onshore yuan’s moves by 2% on either side.

Weakness in mainland stocks continued as trading resumed after holidays, with the CSI 300 Index sliding as much as 1.6%. Financials and consumer staples led losses.

“Any concrete news on a new China round of fiscal stimulus would be helpful, but our sense is that we may still need to wait for the July politburo meeting,” said Rodrigo Catril, currency strategist at National Australia Bank Ltd.

China’s travel spending during the holiday fell short of pre-Covid levels, adding to concerns the post-Covid recovery in the economy is losing steam. Manufacturing data for June, which will be released later this week, are expected to show a continued contraction in the sector amid weak demand, according to Bloomberg economists.

There have been barely any signs of direct intervention to prop up the yuan this year. In May, China’s foreign-exchange regulator vowed it would “strengthen the guidance of market expectations and take actions to correct pro-cyclical and one-way market behaviors when necessary.”

But that doesn’t mean the PBOC can’t go back to its playbook of supporting the currency. Last year, the central bank adopted measures such as a string of much stronger-than-expected fixings, cutting the reserve requirement ratio for foreign-currency deposits and increasing the cost for traders looking to short the yuan.

Monday’s currency fixing “could be the first concrete indication from the authorities that they see yuan weakness as being overdone,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group. “With Japanese officials also coming out and warning against excessive yen weakness, it does seem likely that we could see a rebound in the yuan this week, especially given that it is month-end when exporters typically convert their export receipts into yuan.”

–With assistance from Ran Li.

(Updates with details of PBOC policy on the yuan management in the ninth paragraph)