China arrests yuan tumble with stronger-than-expected fixing

[HONG KONG] The offshore yuan steadied near a record low, after China signalled with a stronger-than-expected fixing that it wants to avoid rapid depreciation.

The currency rose 0.1 per cent to 7.1699 a dollar as of 2.30pm in Hong Kong. The People's Bank of China (PBOC) set its daily reference rate at 7.1277 on Thursday, after the offshore yuan tumbled overnight. Escalating tensions between the US and China had spurred speculation Beijing was willing to let the yuan weaken to shore up exports.

Traders said they saw some state-run banks selling dollars in the afternoon. The currency extended gains just after 2pm local time, a likely sign that Chinese authorities may have helped stabilise the yuan.

The exchange rate has become a focus of political sparring between Washington and Beijing, with President Donald Trump repeatedly accusing China of manipulating its currency. Chinese officials have said they favour a stable yuan, after a shock devaluation in 2015 that roiled global asset prices and undermined investor confidence in Chinese financial markets.

"The fixing is only slightly stronger than the market expected, so it may suggest that the policy makers are so far ok with orderly depreciation," said Gao Qi, a currency strategist at Scotiabank in Singapore. "Looking ahead, if Trump announces sanctions that are tougher than we already know, the yuan will break 7.2."

From daily fixings to mopping up liquidity in Hong Kong, China's central bank has many tools at its disposal should it wish to steer the currency's level. The currency can still experience dramatic moves when key support lines are broken, such as last August when the yuan weakened past 7 per dollar for the first time since the global financial crisis.

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Moves can also accelerate when the PBOC is seen allowing weakness - like in early 2018, when the yuan fell the most in two months as authorities gave banks the green light to submit quotes for weaker fixings.

The reference rate is decided based a formula that takes into consideration of the onshore yuan's official close at 4.30pm on the previous day and major currencies' moves overnight.

The onshore rate, which is also near its weakest since 2008, was up 0.15 per cent.

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