China is unlikely to let the yuan weaken past the key psychological level of 7 per US dollar any time soon, market observers have said.
Just three of 18 traders and analysts surveyed on Wednesday and Thursday said the Chinese currency would breach that milestone this year, although a majority see it happening by the middle of next year.
Falling beyond 7 for the first time in a decade would further strain relations with the US and spur capital outflows, some respondents said.
The People’s Bank of China yesterday set the yuan’s reference rate at 6.9154 to the US dollar, the weakest level since January last year.
The yuan fell 0.11 percent to 6.9220 per US dollar as of 2:33pm in Shanghai yesterday.
“We expect that the trade uncertainty will keep the yuan weak, but the Chinese authorities likely want to avoid a situation of snowballing negativity surrounding the currency,” said Julian Wee, an investment strategist at Credit Suisse AG private banking in Singapore. “Existing capital controls and improving economic data from policy stimulus should help to partially counter the negative impact of the trade tensions.”
Including the three who see a break of 7 this year, 11 respondents expect the yuan to pass that mark by the end of June next year, citing reasons from a stronger greenback to a worsening trade conflict.
There is some disagreement on the consequences of a move beyond 7: Mizuho Bank Ltd’s Ken Cheung (張建泰) said falling past that level would be “catastrophic to China’s economy and financial stability,” while Standard Chartered PLC’s Ding Shuang (丁爽) does not foresee large outflows due to capital controls.
China’s central bank is considering a range of risks facing the currency and preparing for a worst-case scenario on the economy, Governor Yi Gang (易綱) said.
The yuan is at a “reasonable and equilibrium level,” and “is strong among developed countries and developing countries,” Yi told Bloomberg in an interview on Sunday in Bali, Indonesia, on the sidelines of the IMF and World Bank meetings.
“For the full year, the yuan will stay in a reasonable range against the backdrop of an appreciating dollar,” he said.
Yi’s comments come days before US Secretary of the Treasury Steven Mnuchin is set to release a report in which he could label China as a currency manipulator and as a trade dispute between the world’s two biggest economies shows no signs of abating.
Yi said he had “very good talks” with Mnuchin in Bali, without elaborating.
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