China’s currency hit lows not seen since last July, and the gap between onshore and offshore rates widened, suggesting greater pessimism among foreign traders.
The yuan has been hurt by a worsening trade conflict between the U.S. and China, and expectations that Beijing will ease monetary policy, while the Federal Reserve is likely to keep raising U.S. borrowing costs.
On Thursday morning, the People’s Bank of China set the dollar’s daily reference rate at 6.7066 yuan, weakening the yuan by 0.2%. The central bank allows the currency pair to move as much as 2% above or below that level onshore, while trading in other financial centers is unrestricted.
In subsequent trading, the currency fell as much as 0.6% to 6.7534 per dollar in the mainland, and by a similar proportion in the Hong Kong offshore market to 6.7861 per dollar, both levels not seen since July 2017.
A month ago, the two rates were nearly identical, but now the offshore yuan buys roughly 0.5% fewer dollars than its counterpart. The increasing gulf indicates overseas institutions are more bearish than peers within mainland China.
One analyst suggested this could prod the central bank into action. "The widening of the onshore-offshore spread makes me cautious," said Ken Cheung, senior Asian currency strategist at Mizuho Bank in Hong Kong. "It could be a trigger for the PBOC to take action to control bearish sentiment if it continues."
After a surprise devaluation in 2015, the two rates diverged as global investors bet aggressively on a further slide. That prompted Beijing to effectively shut the offshore market at various points in 2016 by making it prohibitively expensive to finance bets against the currency, traders said at the time.
The central bank has guided the yuan to stronger-than-expected daily levels since mid-June, according to Commerzbank analysts, probably aiming to slow the pace of decline. But they said investors were unlikely to stop selling the yuan unless the PBOC intervened.
Write to Saumya Vaishampayan at [email protected]
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