China’s central bank assures firms yuan won’t fall further

Bloomberg

Senior People’s Bank of China (PBOC) officials reassured foreign companies that the currency won’t continue to weaken significantly, a day after the yuan fell below 7 per dollar for the first time since 2008.
The central bank held a meeting with a number of foreign exporters in Beijing, at which officials also said that companies’ ability to buy and sell dollars would remain normal, according to a statement provided to Bloomberg.
The yuan gained in offshore trading following the news, reaching 7.0428 per dollar, its strongest level this session.
The PBOC didn’t name the officials or the companies that attended the meeting.
On Monday, China let the yuan fall in onshore trading below the level that it has defended for years, in a move that was interpreted as a salvo in the trade war with the US and roiled global markets. Officials are now steering against the idea that the yuan will continue to fall and the charge by the US administration that it’s deliberately manipulating the currency.
A precipitous decline in the yuan would affect China-based foreign firms to the extent that imports used in production would become more expensive. A sharp decline would also raise concerns about capital outflows and tightening of exchange controls. For domestic companies, a falling yuan affects those with foreign debt, significant dollar-denominated costs, and a dependence on local consumers the most.
On Tuesday, the PBOC set its daily reference rate at 6.9683 per dollar, stronger than 6.9871 level forecast in a Bloomberg survey of 19 traders, analysts.
The statement added that the central bank and the State Administration of Foreign Exchange will work to keep exchange management policy consistent and stable, and that two-way fluctuation in the yuan’s exchange rate will be “the norm” in the future.
“I am fully confident that the yuan will remain a strong currency in spite of recent fluctuations amid external uncertainties,” PBOC Governor Yi Gang said. President Donald Trump called the yuan’s plunge below the symbolic level of 7 per dollar “currency manipulation” in a tweet.

Yuan weakens after PBOC sets fixing closer to 7 a dollar
Bloomberg

China’s central bank set its daily currency reference rate marginally stronger than 7 a dollar, leaving analysts anticipating on Thursday’s fixing as a key policy signal.
The Wednesday level of 6.9996 gives the People’s Bank of China little headroom if it wants to track the spot rate lower while staying on the strong side of 7. The currency recently breached that key psychological level, stoking criticism from Trump and roiling global markets, but the fixing hasn’t.
“Investors may be concerned that the fixing may break 7 in the future, which will be seen as a sign that room for depreciation remains large,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. “The fixing in the coming days will send very important signals on the central bank’s stance.”
The PBOC is seeking a balance between allowing more flexibility in the yuan amid an escalation of the trade war, and preventing a vicious cycle of depreciation and capital flight. Officials vowed Tuesday to keep the exchange rate steady, helping the currency rebound from its weakest level since 2008.

The PBOC is seeking a balance between allowing more flexibility in the yuan amid an escalation of the trade war, and preventing a vicious cycle of depreciation and capital flight. The PBOC has helped create the perception that levels matter in the fixing and the spot rate. Monday’s plunge came after the central bank set the reference rate weaker than 6.9 per dollar for the first time since December. When the spot rate approached 7 in the past, officials were seen to take extreme steps to prevent further depreciation.
It’s not just the dollar the yuan has fallen against. The Bloomberg replica of the CFETS RMB Index, which tracks the Chinese currency against 24 exchange rates, is approaching the lowest level since the basket was created in 2015.
JPMorgan Chase & Co. joined investment banks to cut the forecasts on the yuan, expecting the currency to slide to 7.35 by year-end against the dollar and the trade-weighted index to fall to 88.7 by the end of 2019. The yuan could sink to as low as 7.7, if the US increases tariffs on Chinese goods or takes other measures against the nation, SocieteGenerale SA analysts led by Jason Daw write in note.