Yuan sinks to six-month low on worsening trade outlook

Hong Kong

A SELL-OFF in China's currency deepened after the central bank moved to free up capital for banks and as investors braced for the next round in an escalating trade dispute with the United States. Stocks headed for a two-year low, while bonds rose.

The yuan slid as much as 0.72 per cent to 6.5414 per US dollar, its weakest since Dec 28, while the offshore exchange rate dropped for an eighth day. The Shanghai Composite Index declined 0.7 per cent and the yield on 10-year debt fell to a two-month low. The People's Bank of China on Sunday said it will cut the required reserve ratio for some banks by 0.5 percentage point.

A slew of negative factors - from a trade war with the US to the risk of a credit crunch - has weighed on China's financial markets in recent weeks. The benchmark Shanghai stock index is on the brink of a bear market after tumbling almost 20 per cent from its recent high, while analysts have started cutting their forecasts for the nation's currency.

Investors have been piling into the relative safety of government debt instead.

"The yuan is faced with a double whammy - escalating trade tensions are hurting sentiment and the easier monetary policy is also pressuring the currency," said Gao Qi, a currency strategist at Scotiabank in Singapore. "Traders will step up shorting the yuan in the offshore market, but we won't likely see massive fund outflows considering the capital curbs in place."

The Treasury Department is planning to heighten scrutiny of Chinese investments in sensitive US industries under an emergency law. Under the plan, the White House would use one of the most significant legal measures available to declare China's investment in US companies involved in technologies such as new-energy vehicles, robotics and aerospace a threat to economic and national security, according to eight people familiar with the plans.

Airlines tumbled amid concern a weaker yuan and higher fuel price will boost costs. Air China and China Southern Airlines sank at least 9 per cent. Hong Kong's Hang Seng Index dropped one per cent, heading for its lowest close since Dec 15, as Macau casinos and Chinese developers slumped. BLOOMBERG