SHANGHAI: China’s yuan declined again versus the dollar on Tuesday, with the midpoint rate hitting a fresh 25-month low, as an imminent US rate hike threatens to further weaken the Chinese currency amid a gloomy growth outlook.
Analysts have largely downplayed the negative implications of the yuan breaching the psychologically key 7-per-dollar level last week, but a too rapid decline of the currency could invite fresh government intervention.
The onshore yuan opened at 7.0200 per dollar and was changing hands at 7.0091 at midday, 43 pips weaker than the previous late session close.
Prior to market open, the People’s Bank of China set the midpoint rate at 6.9468 per dollar, the lowest since August, 2020.
China kept its benchmark lending rates unchanged at a monthly fixing on Tuesday, as expected, as authorities appeared to hold off immediate monetary easing as central banks elsewhere tightened policy.
Divergent Sino-US monetary policies have led to China’s growing yield disadvantage, contributing to yuan’s weakness.
China’s yuan eases ahead of bumper global central bank week
Chinese 10-year treasuries yield 80 basis points lower than their US counterparts, the biggest discount in more than 13 years.
The spread will likely widen further, with the Federal Reserve widely expected to deliver another hawkish interest rate hike later this week at its September policy meeting to stem rampant price rises.
Wen Bin, chief economist at China Minsheng Banking Corp, said the dollar will likely strengthen further but there was no need to panic.
“Moderate yuan deprecation helps stabilize exports, and stimulate external demand,” he wrote.
China’s improving economic fundamentals would bolster the yuan, while the government still has many tools up its sleeve to prevent a possible “herd effect”, he added.
Hao Hong, economist at Grow Investment Group, said yuan weakness reflects deteriorating global fundamentals, and the divergence between the Fed and the PBOC.
“It would not be surprising to see the CNY depreciate further beyond 7. It is just economic cycle at work – as always,” he wrote.