PBoC may let yuan slide past key threshold of 7 per dollar

An employee arranges bundles of US dollar banknotes and Chinese yuan in an arranged photograph in Seoul. The yuan is set to slide past 7 per dollar with scarcely a murmur as a range of metrics show the currency would still be relatively expensive against its non-dollar peers, according to analysts.

The yuan is set to slide past 7 per dollar with scarcely a murmur as a range of metrics show the currency would still be relatively expensive against its non-dollar peers, analysts say. The authorities will allow the currency to weaken past that key psychological barrier and merely seek to prevent a rapid decline that may cascade into a disorderly selloff, according to Societe Generale SA and Barclays Plc, among others. The 7 threshold has far less significance in a world where the dollar is rallying against everything. While the yuan has tumbled about 8% versus the greenback this year, it has strengthened against the currencies of major China’s export rivals such as Japan and South Korea. The yuan’s trade-weighted basket is just about where it was at the end of December. “I don’t think the People’s Bank of China (PBoC) aims to defend seven,” said Wei Yao, chief China economist at Societe Generale in Hong Kong. “It’s the speed that matters. The yuan will still be expensive even after dollar-renminbi breaches seven,” she said, using another name to refer to China’s currency. While allowing the yuan to slide beyond 7, the central bank may continue “to warn off aggressive yuan bears via explicit communication and implicit interventions,” Yao said. How China manages the yuan’s decline is of vital importance to global financial markets, given the country accounts for an ever larger proportion of world trade. The currency’s level is particularly crucial in Asia, where it plays the role of an anchor for its peers. Economists are also watching to see whether its slide deters the PBoC from further easing policy to support a slowing economy. The global focus on the yuan intensified this week as the dollar’s rally gathered pace in the fallout from Jackson Hole. China’s currency slipped to a two-year low of 6.923 on Monday and ended August with a decline of 2.2%, a sixth month of losses. The last two occasions the yuan broke below 7, the backdrop was very different. The currency tumbled as much as 1.6% on Aug 5, 2019, amid a tumult in financial markets caused by the US-China trade war. The yuan again weakened past 7 in February 2020 as the nation’s financial markets came under ferocious selling during the early days of the coronavirus outbreak. A yuan weaker than 7 would still carry some risk - in the shape of a potential increase in capital outflows. “Taking into account the dollar strength and the monetary policy divergence widening, tolerating renminbi depreciation above the 7 handle will risk un-anchoring RMB depreciation expectations and capital outflow risk,” said Ken Cheung, chief Asian foreign-exchange strategist at Mizuho Bank Ltd in Hong Kong. Still, the currency is likely test the 7 level in coming months, he said. The recent trend for flows has been mixed. Global funds boosted holdings of the nation’s bonds for the first time in six months in July, while stock inflows through the China-Hong Kong trading programme remained positive in August. China will attract capital inflows with its positive long-term growth prospects, an official at the State Administration of Foreign Exchange said Friday, adding that supply and demand in foreign exchange is basically balanced.   China’s authorities have plenty of options to signal discomfort with the pace of the yuan’s decline. So far, they have relied on the daily yuan fixing mechanism to limit the currency’s movement, setting a stronger-than-expected rate for eight straight days through yesterday. Other steps they can take include making another cut to banks’ required reserve ratio for foreign-currency holdings, further tweaking the daily fix, or making verbal intervention, said Lemon Zhang, a foreign-exchange strategist at Barclays in Singapore.