Offshore yuan wallows near record low as Sino-US tensions worsen

[SHANGHAI] China's yuan inched up from a record low in offshore trade on Thursday, helped by firmer-than-expected central bank guidance, although escalating Sino-US tensions remained a heavy weight on the currency.

Hostile diplomacy between the world's two largest economies intensified with China expected to pass a controversial national security law on Hong Kong. China's National People's Congress is set to vote on the draft law at the end of its annual session on Thursday.

The offshore yuan rebounded to 7.1838 per dollar on Thursday morning from a record low of 7.1966 hit overnight.

"The door is open for US President Trump to rescind Hong Kong's special status and hurt its position as an international financial centre but no one is sure if and when this will happen," UBS said in a note.

Washington is currently crafting a range of options to punish China over its tightening grip on Hong Kong, including sanctions, tariffs and restrictions on Chinese companies, according to people familiar with the discussions.

Prior to market opening, the People's Bank of China (PBOC) set the yuan's midpoint rate at 7.1277 per dollar, weaker than the previous fix of 7.1092, but much firmer than market projections.

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Several traders said yuan depreciation expectations have picked up, with increasing queries from corporate clients about whether they should buy dollars now.

Sino-US trade tensions have been the main source of yuan weakness, as many investors believed bilateral relations would deteriorate further, said a trader at a Chinese bank.

"The yuan is absorbing most of the impact on FX so far, with USD/CNY breaking above 7.15 to levels last seen in September 2019 as the trade tensions with the US peaked," strategists at ING said in a note. "Markets are now seeing increasing chances that the PBOC will allow its currency to depreciate further in reaction to the possible US sanctions."

The onshore yuan was at 7.1644 on Thursday morning, 36 pips firmer than the previous late session close.

REUTERS