Yuan inches up against US dollar as China state banks step in

Shanghai

CHINA'S yuan slowly rallied against the US dollar on Tuesday morning as major state-owned Chinese banks stepped in to pluck the currency from near-decade lows, offsetting pressure from the stronger greenback.

State-run Chinese banks were seen selling dollars at around 6.97 per dollar in the onshore spot foreign exchange market in early trade on Tuesday, three traders said, in an apparent attempt to arrest sharp losses in the currency.

The move helped the onshore yuan inch up by 0.14 per cent in morning trade, even as the dollar traded just below a 16-month high versus a basket of its peers in overseas markets.

Prior to the market opening on Tuesday, the People's Bank of China (PBOC) lowered the midpoint rate for a fourth straight day to 6.9629 per dollar, 153 pips or 0.22 per cent weaker than the previous fix of 6.9476.

Tuesday's fixing was the weakest since Nov 1.

In the spot market, the onshore yuan opened at 6.9681 and fell to a low of 6.9703 at one point in early trade, not far from a decade-low of 6.9780 hit on Oct.31.

By midday, it was changing hands at 6.9550.

Traders said dollar liquidity offered by the state banks lifted the yuan, but huge dollar demand from both corporate clients and traders' proprietary accounts quickly eroded the earlier gains.

"The 6.97 per dollar level offers strong support currently.

It's a level that the central bank would firmly protect for now," said a chief trader at a Chinese bank.

Market participants suspect authorities are keen to prevent the yuan from weakening too sharply before a meeting between US President Donald Trump and his Chinese counterpart President Xi Jinping later this month.

The leaders plan to meet on the sidelines of a G20 summit in Argentina at the end of November for a high-stakes talk.

While markets do no expect the meeting to produce a breakthrough agreement ending the US-China trade war, there are signs that diplomatic tensions between Washington and Beijing may be easing.

US Treasury Secretary Steven Mnuchin has resumed discussions with China Vice Premier Liu He, with the two speaking by telephone on Friday, the Wall Street Journal reported citing sources.

Mr Liu is expected to visit the United States shortly for talks ahead of the Trump-Xi meeting, the South China Morning Post reported.

As the yuan approached the psychologically critical 7 per dollar again, the intervention by state banks on Wednesday has revived the debate over how strongly the central bank will defend that level if China's economy continues to cool and the US trade battle worsens.

Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong said he was maintaining his call that Beijing will keep the yuan above 7 for the rest of this year.

"The PBOC clarified its stance to defend the RMB exchange rate to anchor RMB expectation. Following PBOC deputy governor Pan's warning on RMB short-sellers, the PBOC said it would reinforce macro-prudential management to keep the RMB exchange rate at a reasonable and equilibrium level if necessary," Mr Cheung said in a note.

In the offshore market, signs of liquidity tightness also lent support for the Chinese unit.

Hong Kong's offshore yuan overnight borrowing rate, or HIBOR, was fixed at 2.68800 per cent on Tuesday, about 1.3 percentage points higher than the previous day's fix of 1.41367 per cent. And Tuesday's fix was the highest since Oct 11.

At midday, the offshore yuan was trading at 6.9465 per dollar. REUTERS