China has tightened controls on trading in its yuan to discourage speculators after a decline against the US dollar amid a tariff dispute with Washington fueled fears of a damaging outflow of capital from the world’s second-largest economy.
Traders must post a 20 percent deposit starting yesterday for contracts to buy or sell yuan on a future date. That raises the cost of betting it will drop and might help to discourage speculative trading.
The tightly controlled yuan has been allowed to decline by about 8 percent against the US dollar since early February.
Photo: Reuters
That helps Chinese exporters that face US tariff hikes by lowering their prices in US dollar terms, but it also encourages investors to shift money out of China, which would have a broader impact by raising financing costs for other industries.
On Friday, the yuan slipped to a 13-month low of 6.91 to the US dollar, close to the highly symbolic level of 7, before strengthening to 6.83 after the margin requirement was announced.
The US-Chinese tariff fight prompted suggestions that Beijing might weaken the yuan to help exporters.
However, analysts say the decline has been driven mostly by China’s slowing economic growth and the diverging direction of US and Chinese interest rates.
Washington on July 6 imposed 25 percent tariffs on US$34 billion of Chinese goods and is considering an increase on an additional US$16 billion, with another US$200 billion list of goods threatened.
Beijing matched Washington’s first round of increases and on Friday threatened penalty charges on another US$60 billion of US imports.
Chinese leaders have tried to stick to long-term economic plans, resisting US President Donald Trump’s demands to change industry development strategies Washington and other governments say violate their market-opening commitments.
That business-as-usual approach has included the People’s Bank of China allowing the yuan to fluctuate more widely.
Beijing is seeking to make the exchange system more market-oriented and efficient.
The central bank “had been largely tolerant” of the yuan’s decline, IG Asia Pte Ltd analyst Pan Jingyi (潘婧怡) said in a report.
However, the latest changes “may have gathered concerns including capital flight,” Pan said.
The margin of decline against the US dollar has been unusually wide because other currencies in the basket used by the Chinese central bank to set exchange rates have not risen along with the greenback.
Compared with the overall basket, the yuan has declined by a smaller margin of 4 percent, according to Carl B. Weinberg of High-Frequency Economics.
“These are trivial moves in the medium term, despite volatility recently,” Weinberg said in a report.
The effectiveness of the latest controls will be limited, analysts said.
The yuan still faces downward pressure as Chinese and US interest rates head in opposite directions.
The US Federal Reserve is raising US rates, while Beijing eases access to credit to pep up cooling economic growth. That encourages investors to convert money into US dollars in search of higher returns.
Due to that, “the outlook of yuan remains weak,” CMC Markets analyst Margaret Yang (楊燕) said in a report.
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