China has allowed its currency, yuan, to tumble beyond the key 7-per-dollar level for the first time in more than a decade.
The situation is a sign Beijing might be willing to tolerate further currency weakness in the face of an escalating trade row with the United States.
The sharp 1.4% drop in the yuan came after the People’s Bank of China (PBOC) set the daily mid-point of the currency’s trading band CNY=PBOC at 6.9225 per dollar, its weakest level since December 2018.
“Today’s fixing was the last line in the sand,” said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong.
“The PBOC has fully given the green light to yuan depreciation”
The shakeout in the yuan comes days after U.S. President Donald Trump stunned financial markets by vowing to impose 10% tariffs on the remaining $300 billion of Chinese imports from Sept. 1, abruptly breaking a brief month-long ceasefire in the bruising trade war.
After opening the onshore session at 6.9999 per dollar, the yuan CNY=CFXS had weakened to 7.0266 per dollar by 0351 GMT, down 1.2% on the day after earlier losing as much as 1.4% of its value. Monday marked the first time the yuan had breached the 7-per-dollar level since May 9, 2008.
With the escalating trade war giving Beijing fewer reasons to maintain yuan stability, analysts said they expect the currency to continue to weaken.
“In the short-term, the yuan’s strength would be largely determined by the domestic economy. If third-quarter economic growth stabilizes, the yuan could stabilize around 7.2 or 7.3 level,” Zhang Yi, chief economist at Zhonghai Shengrong Capital Management in Beijing.
Capital Economics senior China economist Julian Evans-Pritchard said the PBOC had probably been holding back against allowing a weaker yuan to avoid derailing trade negotiations with the United States.
“The fact that they have now stopped defending 7.00 against the dollar suggests that they have all but abandoned hopes for a trade deal with the U.S.,” he said.
The PBOC gave few clues about its intentions. In a statement on Monday, the central bank linked the yuan’s weakness to the fallout from the trade war, but said it would not change its currency policy and that two-way fluctuations in the yuan’s value are normal.
“Under the influence of factors including unilateralism, protectionist trade measures, and expectations of tariffs against China, the yuan has depreciated against the dollar today, breaking through 7 yuan per dollar,” the PBOC said.