Breaking News
Investing Pro 0
Ad-Free Version. Upgrade your experience. Save up to 40% More details

China's Yuan Pares Gains, Stocks Decline as Trade Worry Persists

ForexAug 06, 2018 02:11
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Bloomberg. Employees arrange boxes at Best Inc.'s warehouse in Shanghai, China, on Monday, Nov. 6, 2017. Photographer: Qilai Shen/Bloomberg

(Bloomberg) -- China’s yuan pared gains and mainland equities declined, as markets tried to find direction after trade tension with the U.S. escalated further over the weekend and Chinese authorities announced a measure to support the yuan late Friday.

The onshore yuan trimmed earlier gains and was little changed at 6.8300 per dollar as of 1:15 p.m. The People’s Bank of China set the daily reference rate at 6.8513, the weakest since May last year, though in line with analyst expectations. The Shanghai Composite Index fell 0.6 percent and the ChiNext gauge slid 1.5 percent. Hong Kong’s Hang Seng Index held on to gains after falling every day last week.

“The market is still worried about the outlook in the trade war, so people are very cautious,” said Qian Qimin, an analyst with Shenwan Hongyuan Group Co. “They are dumping smaller caps first as their valuations are higher.”

Shanghai-based Qian said the next key level to watch for the Shanghai Composite is 2,691, a low it hit on July 6. If the index falls below that, it would hurt confidence and the selloff could escalate, he said. The benchmark was at 2,723 Monday, down 23 percent from its January high.

Here’s a look at some of the moves on Monday:

  • GCL-Poly Shares Tumble as $1.9 Billion Unit Sale Collapses
  • Chinese Pig Breeders Slump After African Swine Fever Breaks Out
  • China Financials Lead Gains as PBOC’s Yuan Move Lifts Confidence
  • Yuan Climbs as Central Bank Raises Cost to Short: Inside China
  • Google (NASDAQ:GOOGL) Is Said in Talks With Tencent, Inspur for China Cloud

Zhang Gang, Shanghai-based strategist with Central China Securities Co.:

  • China’s central bank doesn’t want the currency to drop further and it will take more actions if depreciation expectations grow
  • Given the latest development in the trade war, investors may have come to realize that it’s going to be a process of tensions and negotiations, and it’s unlikely for both sides to come up with any extreme moves.

On Friday evening:

  • The PBOC said it will impose a reserve requirement of 20 percent on some trading of foreign-exchange forward contracts. That will effectively make it more expensive to short the yuan, which fell on Friday to the lowest since May 2017
  • And about an hour later, officials released a list of $60 billion in U.S. goods that Beijing intends to hit with tariffs, in retaliation for Trump’s plan to impose duties on $200 billion in Chinese imports.

The timing of the announcements seemed coordinated to avoid kneejerk declines in China’s currency from the tariff proposal, according to Deutsche Bank AG (DE:DBKGn). Imposing a levy on forward trades is a tactic that the central bank used to stabilize the yuan against the dollar in the aftermath of its shock devaluation in 2015. China’s currency and stocks are both among the world’s worst performers over the past three months.

“The yuan kept falling when China did this last time in 2015, so I don’t think the PBOC’s move will significantly change the market tone,” Hao Hong, chief strategist at Bocom International Holdings Co., said by phone. “The trade war is nowhere near its end and China’s economy is slowing down, so why would the trend reverse?”

The Ministry of Finance said that duties ranging from 5 percent to 25 percent will be levied on more than 5,000 categories of American imports if the U.S. delivers its proposed taxes on another $200 billion of Chinese goods. The list targets everything from planes and computers to wigs and textiles, with the highest tariff applying to more than 2,400 products such as meat, wheat, wine and liquefied natural gas.

The effective additional tariff rate is about 13 percent, which is much less than a proportional retaliation, Goldman Sachs Group Inc (NYSE:GS). economists wrote in a note. “Nevertheless, this measure still marks a step up in US-China trade tensions.”

“The news headlines from Friday will have some negative impact on share market sentiment,” said Dai Ming, Shanghai-based fund manager with Hengsheng Asset Management Co., who added that he doesn’t expect Chinese equities to recover until there’s evidence that the trade dispute is being resolved. “The stock market isn’t the government’s priority.”

China’s stock woes have caught the attention of U.S. President Donald Trump, who tweeted about the market’s underperformance versus U.S. shares on Saturday and told a rally in Ohio that the declines are weakening that nation’s bargaining power in the trade war. And White House economic adviser Larry Kudlow suggested Friday that China is letting its currency fall to offset losses from the trade war, though he added that the decline is partly due to weak economic fundamentals.

Eight straight weeks of losses have brought the yuan close to 7 per dollar, a level it hasn’t reached in more than a decade. Analysts had identified that as a key milestone where officials may seek to arrest declines, to counteract the mounting risk of capital outflows. China burned through foreign reserves propping up its currency after the devaluation almost three years ago spurred a rush to take money out of the country.

The levy on forwards is aimed at preventing macro financial risks as the foreign-exchange market shows signs of volatility amid recent trade frictions, and shouldn’t be interpreted as a capital control, according to the PBOC.

What else to watch:

  • Data on China’s second quarter current-account balance is due Monday. The nation is likely to report a deficit for the first six months, the first time that’s happened since China started to publish the statistic on a half yearly basis in 1998, according to Deutsche Bank, which cut its year-end forecast for the yuan to 6.95 per dollar from 6.8 on Aug. 1
  • If the Shanghai Composite falls just 0.3 percent on Monday, it’ll return to a 2 1/2-year low
  • An update on China’s foreign-exchange reserves for July is due Tuesday, with analysts expecting a slight decline
  • And China trade figures for July are scheduled for Wednesday.

Here are additional analyst comments on the Friday night news, and how it may impact markets:

Deutsche Bank (Alan Ruskin, global co-head of foreign-exchange research)

  • Shows some good faith that China is not encouraging yuan weakness, “even if there is a widespread sense in the market that they have hitherto been ok with a benign neglect stance on the currency”
  • China may be keeping some powder dry to use currency as a trade tool later if needed, recognizing that the yuan weakening past 7 would be seen by the U.S. as an act of retaliation
  • There’s a policy contradiction in that China is seeking to keep local liquidity flush, while also trying to slow or stop the yuan weakening; this “will be the biggest challenge for the authorities”

Hengsheng Asset Management Co. (Dai Ming, fund manager)

  • “Everything is about stability now”: watch for further measures to cushion the economy
  • “To stabilize foreign trade and to offset the impact from U.S. tariffs, the yuan will have to gradually depreciate. There is no better way”
  • Some policy signals have been confusing, such as whether officials are continuing with their deleveraging campaign and whether China would defend the yuan at 6.7 per dollar; “it’s too hard to make calls unless investors can get a clear understanding of China’s strategy”

Everbright Sun Hung Kai Co. (Kenny Wen, strategist)

  • While investors will focus on A shares and the yuan, Hong Kong stocks will be affected as well given that many H-share companies are dual-listed and there is an increasing correlation between yuan movement and Hong Kong equities
  • “We believe Hang Seng Index will be highly volatile in the beginning but may end up higher on Monday”; market should benefit from a rebound in yuan and gains in U.S. equities

Goldman Sachs (economists including MK Tang)

  • Reserve requirement on forwards “points to policy discomfort with the rapid pace of CNY depreciation, although any unfavorable incoming data and news could still take the currency weaker”
  • Substantial weakening pressure on yuan has probably made authorities wary of the risk of an adverse feedback loop, as happened in 2015-16
  • “More generally though, we believe the broad framework of CNY management probably remains the same — i.e., the authorities still tend to be comfortable with market-driven CNY moves, so long as they are perceived to be in line with changes in the economic outlook and are not too rapid (like the pace in the last couple of days)”

CIBC (Bipan Rai, strategist)

  • To examine the degree of potential outflows, market can watch the performance of the Shanghai Composite; “If we continue to extend lower, that could exacerbate a risk-off tone and a bid for traditional safe haven assets including Treasuries”

Banco Bilbao Vizcaya Argentaria (Xia Le, chief Asia economist)

  • Move shows the PBOC is increasingly concerned with the yuan’s depreciation, which could lead to a chain reaction and trigger capital flight
  • Acting in the forwards market first suggests the PBOC wants to target short sellers
  • The central bank will use further measures to reverse the market’s overly bearish expectations on the yuan, which will remain basically stable against a basket of currencies in the near term
  • The currency’s long-term fate hinges on the trade war

ING (Viraj Patel, strategist)

  • Chinese officials likely “noted something different in CNY trading dynamics in recent days -- since the US tariff threat earlier in the week -- and felt the need to step in”
  • While on the margin this adjustment may weigh on USD sentiment, “the question is whether it can actually stop the trend of a weaker CNY”
  • “As for the immediate future, this will be seen as a solid statement of intent from the PBOC that they have little desire to see USD/CNY trading with a 7.00 handle. But 2015/2016 tells us that you can’t always have what you want”

China's Yuan Pares Gains, Stocks Decline as Trade Worry Persists

Related Articles

The GBPUSD Rebounds Following Rishi Sunak Budget Speech
The GBPUSD Rebounds Following Rishi Sunak Budget Speech By - Oct 27, 2021

By Sam Boughedda — The GBP/USD saw a bounce earlier today following U.K. Chancellor Rishi Sunak's budget speech. In the upbeat speech, Sunak said the U.K. economy had...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email