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China warming to idea of yuan as trade war weapon, analysts say

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Analysts say the yuan's sudden slump is a sign China's central bank will allow more depreciation after the US vowed to hit the country's products with new tariffs.

[HONG KONG] Analysts say the yuan's sudden slump is a sign China's central bank will allow more depreciation after the US vowed to hit the country's products with new tariffs.

The move by the People's Bank of China to set the yuan fixing weaker than 6.9 per US dollar for the first time this year suggests policy makers "may now finally be willing to use the exchange rate as a tool in the US-China trade fight," said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd.

The central bank said Monday that the currency's slump past 7 was due to "protectionism," adding that it's able to keep the yuan stable at a reasonable, balanced level.

Analysts still expect the PBOC will eventually act to prevent excessive turbulence in the yuan, which fell as much as 1.5 per cent to 7.0424 per dollar on Monday.

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Market voices on:

• Khoon Goh (ANZ Banking)

Now the question is how much the authorities will tolerate yuan weakness

Risk assets will be vulnerable to the breach of the 7 level. There had been decent foreign inflows in the past couple of months into EM Asia on the back of expectations of Fed and other major central bank easing, and the Osaka trade truce

But with the Fed less dovish last week, Trump with his surprise 10 per cent tariff and now the Chinese authorities letting the yuan go, expect to see near-term outflows leading to pressure on Asian asset markets

• Frances Cheung (head of Asia macro strategy at Westpac Banking Corp.)

There is no hard level to defend, but still the Chinese authorities are likely to smooth market movement if it is too rapid

Some depreciation in the yuan is not going to help counteract the tariffs much, given high tariff rates

With additional tariffs on the way, the PBOC is likely to come up with more easing to support growth

• Gao Qi (currency strategist at Scotiabank)

If CNY reaches 7.2, the yuan exchange rate could stabilize again as the regulators will step in to avert market panic

It is hard to estimate when EM Asian currencies will stop depreciating as this round of weakening is triggered by Trump's latest tariffs

We may see another one to three sessions of drops in all EM Asian currencies before stabilizing

• Tommy Xie (economist at Oversea-Chinese Banking Corp.)

There's no clear resistance for now. I think market is looking at 7.2-7.3 per dollar now

But it still depends on how China sets the fixing. Should the fixing be set at 6.99 for the next few days, market may gradually calm down

Should the fixing drift above 7, I think the next target will be 7.2-7.3 range, which reflects the additional tariffs

• Ken Cheung (senior currency strategist at Mizuho Bank Ltd.)

It appears that the tariffs hike suggests the return of tit-for-tat responses and a suspension of trade talks

The PBOC sees no need to keep the yuan stable in the near term

• Zhou Hao (an economist at Commerzbank AG)

The first question at this point is whether China wants to weaponize its currency to retaliate in a messy trade war

It remains questionable, but certainly today's move suggests that China sees there is a need to allow more currency flexibility to counter the headwinds from the trade front

• Christy Tan (head of markets strategy at National Australia Bank Ltd.)

Now that 7 has been broken both onshore and offshore, it may be deemed part of the response to the new tariffs

The authorities may only step in to manage the market if it gets disorderly, such as a sustained spike in volatility and herd behavior across spot, forward, options trading and so on

• Ben Kwong (executive director at KGI Asia Ltd.)

CNH losing the 7 level is a very bad news for Hong Kong's listed Chinese companies, as they earn profits in the yuan and earnings denominated Hong Kong dollars would fall. Investment appetite over those stocks will be hurt

• Alvin Cheung (associate director at Prudential Brokerage)

The currency is now the single most important factor affecting Hong Kong stocks, as well as onshore stocks right now, and the currency hangs on trade developments

If the US carries forth with the tariffs, there could be further downside for stocks affected by the yuan, and I would advise investors to tread extra carefully when buying Hong Kong shares

Subsiding fluctuations in the offshore and onshore yuan is now a prerequisite for any kind of stability in stocks

BLOOMBERG