Yuan Extends Drop as PBOC’s Weak Fix Worsens Fragile Sentiment

China’s yuan tumbled past the closely watched 7.2-per-dollar level and analysts are bracing for more losses after Beijing showed little resistance to the decline.

(Bloomberg) — China’s yuan tumbled past the closely watched 7.2-per-dollar level and analysts are bracing for more losses after Beijing showed little resistance to the decline.

The offshore yuan fell as much as 0.3% to 7.2007 to the greenback on Wednesday, the weakest since November. A lack of aggressive stimulus from authorities is fueling a wave of selling in Chinese assets, with a gauge of the nation’s equities listed in Hong Kong heading for a third day of losses. 

Investors are growing increasingly frustrated with Beijing’s reluctance to roll out more policy steps to shore up growth which has disappointed after the nation rolled back its Covid curbs. But some traders say the weak currency may be part of Beijing’s plan to support its economy as a depreciating yuan would help shore up demand for the nation’s exports.

“Markets are growing impatient over lack of follow-through on China stimulus,” said Christopher Wong, strategist at Overseas Chinese Banking Corp. Resistance for the offshore yuan is at 7.2150, he added. “A timeline to look forward to is the Politburo’s semi-annual economic conference in end July for any major fiscal announcement. But in the meantime, the silence is deafening.”

The offshore yuan trimmed its losses to trade at 7.1980 as at 1:56 p.m. in Shanghai. The onshore yuan was around 7.1941.

Major Chinese banks did not sell the dollar aggressively, although some exporters had begun to place orders to sell the greenback, which helped support the yuan, according to traders who asked not to be named as they are not authorized to speak publicly.

The People’s Bank of China set the yuan’s reference rate at 7.1795 per dollar Wednesday, the weakest level since Nov. 29. The fixing limits swings in the onshore yuan by 2% on either side, and the move may suggest that authorities are willing to tolerate a further decline.

The yuan has slumped more than 4% over the last three months to trail all but one of its peers in Asia. Capital outflows from the onshore market and bets that the Federal Reserve will hike interest rates further are also weighing on the Chinese currency.

China’s economic recovery since the dismantling of its Covid curbs has been unimpressive, with the nation’s manufacturing sector contracting and retail sales trailing estimates in May. The call for more stimulus is growing, with state-run media running front-page articles Wednesday saying the central bank is likely to ease monetary policy further.

Holiday Effect

The yuan’s breach of the 7.2 mark came as currency traders positioned for the semiannual testimony by Fed Chairman Jerome Powell before Congress on June 21-22. Hong Kong is shut for a holiday on Thursday while onshore Chinese markets will be closed Thursday and Friday.

The rise in US Treasury yields comes ahead of Powell’s testimony that “could see him utter more hawkish comments that could spur hawkish re-pricing and strengthen the dollar further,” said Fiona Lim, senior foreign exchange strategist at Malayan Banking Bhd. in Singapore.

The selloff in stocks is just a “continuation of the weak sentiment” as stimulus hopes have been dashed, said Willer Chen, a senior research analyst at Forsyth Barr Asia. “Holiday effect” could be part of reason behind the weakness too, he added.

Policy Signal

With strategists from Goldman Sachs Group Inc. to Mizuho Bank Ltd. flagging 7.20 as a floor for the yuan, traders will be watching to see if the currency’s drop will slow. Sentiment in the options market shows some small signs of optimism even if the broader mood remains negative.

“Some think that more concrete, non-monetary stimulus measures will only come out at or after the Politburo meeting in end-July,” Joey Chew, Head of Asia FX Research at HSBC Holdings Plc, wrote in a note. “If so, some foreign-exchange policy smoothing may be needed in the meantime as we head into the dividend outflow season for China.”

–With assistance from Zhu Lin, Karl Lester M. Yap and Ran Li.

(Updates story throughout to add background, quotes and fresh prices. An earlier version of the story corrected the move in the onshore yuan in the second paragraph.)

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