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China's offshore yuan on brink of record low

Shanghai

CHINA'S offshore yuan slumped to approach a record low amid concern authorities will use depreciation to counter US measures amid rising tensions.

The currency slid as much as 0.45 per cent against the greenback on Wednesday to within 0.3 per cent of its low reached on Sept 3. The offshore yuan has lost 1.2 per cent in the past month, the biggest drop after the Argentinian peso among 32 major currencies tracked by Bloomberg.

Losses have steepened in recent weeks as the US administration stepped up rhetoric against the Communist Party over its initial handling of the coronavirus and intention to crack down on dissent in Hong Kong. The People's Bank of China fixed its daily yuan reference rate at the weakest level since 2008 this week, which to some analysts signalled tolerance for depreciation.

"The PBOC will allow the yuan to continue weakening as US-China trade tensions continue rising, as long as it is orderly," said Qi Gao, a currency strategist at Scotiabank.

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From its daily fixings to mopping up liquidity in Hong Kong, China's central bank has many tools at its disposal should it wish to cushion the currency. Declines can get extreme when key support lines are broken, like last August when the yuan weakened past 7 per US dollar for the first time since the global financial crisis. Moves can also accelerate when the PBOC is seen allowing for weakness - in early 2018, the yuan fell the most in two months as authorities gave banks the green light to submit quotes for weaker fixings.

The yuan was relatively resilient earlier in the year, despite the growing impact of the coronavirus on the economy. A slump by the currency in March was partly erased in April even after data showed gross domestic product shrank 6.8 per cent in the first quarter from a year ago. Declines resumed this month.

While a weaker currency would give Chinese exporters an advantage selling their products abroad, it also risks drawing the ire of Washington at a time when tensions between the two countries are increasing on multiple fronts. The US is considering a range of sanctions on Chinese officials and businesses to retaliate against Beijing's planned national security law on Hong Kong.

The two countries, which signed a trade agreement as recently as January, are also sparring over US allegations that China hid the origin and extent of the coronavirus outbreak.

"The yuan is caught in the crossfire between China and the US," said Tommy Xie, an economist at Oversea Chinese Banking Corp in Singapore. "Investors are growing increasingly pessimistic about the yuan as the conflicts between the two countries are getting more complicated. The yuan will keep weakening in the near term, with the onshore rate testing 7.2." BLOOMBERG

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