The Chinese yuan slid to its weakest level against the dollar in more than a decade on Tuesday, raising questions about how far policymakers might let the currency fall.
The People’s Bank of China set the dollar’s reference rate, a range for domestic trading that officials set daily, at 6.9574 yuan per US dollar. The currency subsequently fell to as low as 6.9750 against the greenback, its weakest since May 2008.
Escalating trade tensions between Washington and Beijing have added pressure to an already slowing Chinese economy, raising speculation about how far the central bank might let the currency fall. On Monday, President Donald Trump said his administration was ready to place tariffs on all remaining Chinese imports to the US if trade talks don’t go anywhere.
Bloomberg News reported that the US is preparing to announce by early December tariffs on all remaining Chinese imports if talks next month between presidents Donald Trump and Xi Jinping fail to ease the tensions. Trump told Fox News a deal with China has to be “great” because the Asian nation has “drained” the US, while he doesn’t think China is “ready” yet.
“Depreciation pressures are intensifying,” said Gao Qi, a currency strategist at Scotiabank in Singapore. “The yuan won’t slide to 7 a dollar before Xi and Trump meets. But if that meeting fails to improve the China and U.S. relations, a drop to 7 will likely be inevitable.”
Reuters reports officials are expected to stop the currency from sliding past a key psychological level of 7 per dollar in the near term, which could trigger capital flight and market volatility.
Hussein Sayed, chief market strategist at FXTM, noted Chinese equities could reverse if the currency weakens past that level. The Shanghai Composite closed up 1% at 2,568.05 on Tuesday.
“The yuan’s weakness also reflects lack of confidence as more stimulus means more fiscal deficit, a negative factor in the longer run,” he added.
The yuan has come under renewed pressure of late, as the PBOC cut its reserve-ratio requirement for a fourth time this year and the yield spread between Chinese and US government bonds hovers near the tightest since April 2011. Risks of capital outflows are emerging, with onshore demand for foreign-exchange surging in September to the highest since late 2016.
“The authorities are likely to take a more stern line if it approaches the 7 level,” said Khoon Goh, head of research at Australia and New Zealand Banking Group in Singapore. “A breach of 7 could intensify depreciation expectations, and cause renewed capital outflow pressures, which will be destabilizing for domestic financial markets.”