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SHANGHAI/SINGAPORE: China’s state banks have been active in the onshore yuan forwards market this week, using swaps to tighten dollar supply and support the Chinese currency, four sources with knowledge of the matter told Reuters.
The spot value of the yuan has fallen sharply this week against the dollar as tensions between China and the United States escalated and prompted fears that their trade war could shift into a currency war.
The sources said banks had conducted significant amounts of buy-sell swaps in the onshore market on Tuesday. Buy-sell swaps help to reduce the supply of dollars that the market can access to short-sell the yuan.
“Yesterday big banks were all selling one-year onshore forward swaps, then in the afternoon the spot dollar-yuan fell,” said a trader at a foreign bank in Shanghai.
One state bank also was seen active in offshore forward swaps, two traders at foreign banks with knowledge of the matter said.
On Wednesday, one-year onshore dollar-yuan forwards were at 175 points, down from 321 points on Monday, according to Refinitiv data. One-year offshore dollar-yuan forwards were at 459 points, down from 640 points on Monday.
“The movement in forward points may reflect a tightening in USD (dollar) liquidity when some market participants need to buy spot dollars and sell them back in forwards. Meanwhile, the spot and outright moves were also partly due to a stabilisation in RMB (yuan) sentiment on Tuesday,” said Frances Cheung, head of macro strategy for Asia at Westpac in Singapore.
China allowed the yuan to trade at more than 7 per dollar on Monday for the first time in more than a decade, after which the U.S. Treasury labelled China a currency manipulator, raising the stakes in the trade war between the two countries.
The currency steadied on Tuesday as Chinese authorities took steps to contain its slide.
Early on Wednesday, the yuan was trading at 7.0353 per dollar in the onshore spot market, down about 0.15% from Tuesday’s late-session close.
The offshore yuan was 0.2% weaker than Tuesday’s close at 7.0701 per dollar.
U.S. President Donald Trump has dismissed fears of a protracted trade war despite a warning from Beijing that labelling it a currency manipulator would have severe consequences for the global financial order.
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BEIJING/SHANGHAI: China’s central bank said on Tuesday that Washington’s decision to label Beijing as a currency manipulator would “severely damage international financial order and cause chaos in financial markets”.
Washington’s decision to ratchet up currency tensions on Monday would also “prevent a global economic and trade recovery,” the People’s Bank of China (PBOC) said in the country’s first official response to the latest U.S. salvo in the two sides’ rapidly escalating trade war.
China “has not used and will not use the exchange rate as a tool to deal with trade disputes,” the PBOC said in a statement on its website.
“China advised the United States to rein in its horse before the precipice, and be aware of its errors, and turn back from the wrong path,” it said.
The U.S. currency accusation, which followed a sharp slide in the yuan on Monday, has driven an even bigger wedge between the world’s largest economies and crushed any lingering hopes for a quick resolution to their year-long trade war.
The dispute has already spread beyond tariffs to other areas such as technology, and analysts caution tit-for-tat measures could widen in scope and severity, weighing further on business confidence and global economic growth.
The U.S. Treasury Department said on Monday it had determined for the first time since 1994 that China was manipulating its currency, taking their trade dispute beyond tariffs.
The U.S. decision was driven purely by political motive to “vent its anger”, said Global Times, an influential Chinese tabloid published by the Ruling Communist Party’s People’s Daily.
China “no longer expects goodwill from the United States”, Hu Xijin, the newspaper’s editor-in-chief, tweeted on Tuesday.
The U.S. decision to label China a manipulator came less than three weeks after the International Monetary Fund (IMF) said the yuan’s value was in line with China’s economic fundamentals, while the U.S. dollar was overvalued by 6% to 12%.
The U.S law sets out three criteria for identifying manipulation among major trading partners: a material global current account surplus, a significant trade surplus with the United States, and persistent one-way intervention in foreign exchange markets.
Chinese state media had warned that Beijing could use its dominant position as a rare earths exporter to the United States as leverage in the trade dispute. The materials are used in everything from military equipment to high-tech consumer electronics.
Shares in some of China’s rare earth-related firms surged on Tuesday amid speculation the sector could be the next front in the trade war.
Beijing could also step up pressure on U.S. companies operating in China, analysts say.
Beijing in June issued a travel advisory warning Chinese tourists about the risks of travelling to the United States, citing concerns about gun violence, robberies and thefts.
Air China said on Tuesday that it was suspending its flights on the Beijing-Honolulu route starting on Aug. 27, following a review of its network.
In a further sign of deteriorating ties, China’s commerce ministry announced overnight that its companies had stopped buying U.S. agricultural products in retaliation against Washington’s latest tariff threat.
“In the end, the United States will eat the fruit of its own labour,” the PBOC said.
Chinese monetary authorities let the yuan fall past the closely watched 7 level on Monday so that markets could finally factor in concerns around the trade war and weakening economic growth, three people with knowledge of the discussions told Reuters on Monday.
The yuan has tumbled as much as 2.7% against the dollar over the past three days to 11-year lows after President Donald Trump’s sudden declaration last week that he will impose 10% tariffs on $300 billion of Chinese imports from Sept. 1.
But it appeared to steady on Tuesday amid signs that China’s central bank may be looking to stem the slide, which has sparked fears of a global currency war.
The offshore yuan fell to a record low of 7.1397 per dollar on Tuesday before clawing back losses after the central bank said it was selling yuan-denominated bills in Hong Kong, a move seen as curtailing short selling of the currency.
Onshore yuan also opened weaker before steadying, but remained below the 7 level. While the central bank set a slightly firmer-than-expected morning benchmark rate, it was still the weakest since May 2008.
The PBOC has insisted the value of its yuan is determined by the market, though it has maintained a firm grip on the currency and supported it when it neared sensitive levels over the past year.
U.S. Treasury Secretary Steven Mnuchin said the U.S. government will engage with the IMF to eliminate unfair competition from Beijing.
A IMF spokeswoman said the organization does not have any immediate comment.
After determining a country is a manipulator, the Treasury is required to demand special talks aimed at correcting an undervalued currency, with penalties such as exclusion from U.S. government procurement contracts.
“Naming China a currency manipulator could open the door for U.S. tariffs to eventually increase to more than 25% on Chinese goods,” according to a note from DBS Group Research.
SHANGHAI/HONG KONG: China’s tumbling yuan found a floor on Tuesday morning after a firmer than expected central bank fixing and a planned bond sale in the offshore market suggested authorities wanted to contain the currency’s recent slide to new lows.
The yuan’s 2.3% decline over three days and breach of its 2008 low of 7-per-dollar roiled global stock, bond and currency markets as investors now worry the currency would become a new front in the long-running U.S.-China trade war.
The slide followed President Donald Trump’s sudden declaration last week of intent to impose 10% tariffs on the remaining $300 billion of Chinese imports from Sept. 1, breaking a brief ceasefire in the bruising trade war.
But Tuesday’s mid-point fixing by the People’s Bank of China around which the yuan is allowed to trade, at 6.9683 per dollar, was firmer than markets expectations.
The PBOC’s announcement of a sale of 30 billion yuan ($4.25 billion) worth of yuan-denominated bills in Hong Kong also suggested the central bank was soaking up cash to prevent speculative short-selling.
The currency opened onshore trade at 7.0699 per dollar. Offshore yuan fell as far as 7.1397 before news of the sale of CNH bills caused it to firm 0.75%.
“The PBOC is sending signals that it would like to mitigate RMB depreciation – by fixing dollar/yuan somewhat low, and by announcing to issue offshore bills,” said Frances Cheung, a strategist at Westpac.
The stock market opened weaker, with the main Shanghai index down 1.75%, taking its losses over 3 days to 5.5%.
U.S. Treasury Secretary Steven Mnuchin said on Monday the U.S. government has determined that China is manipulating its currency and will engage with the International Monetary Fund to eliminate unfair competition from Beijing.
Chinese policy sources, however, told Reuters that the central bank had let the yuan slide past the key 7-per-dollar level so that markets could finally factor in concerns around the Sino-U.S. trade war and weakening economic growth.
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