Major state-owned banks in China have been selling USD to prevent the yuan from a downward spiral. As the trade war between the US and China worsens, it is having an adverse impact on yuan and it now stands at a 14-month low.
The traders stated that during the afternoon trade session yesterday, the banks were selling USD at about 6.9 per dollar. This selling took place in the onshore foreign exchange market, where the yuan started trading at 6.8571 per dollar.
However, as the trading continued, the yuan weakened and reached a low of 6.8965 per dollar. This is the lowest it has traded versus the dollar since 15 May 2017.
As the domestic trading closed, the yuan was trading at 6.8620 per US dollar. Offshore yuan was trading at 6.8968 per dollar by close of play.
Taking into consideration the ongoing trade war between the US and China, the yuan is poised to fall for eight successive weeks. This will be the longest losing spree that yuan has experienced since 1994, when the exchange rate system was combined.
The previous week, the yuan was under more stress after the US administration stated its intention of increasing the tariffs from the present 10% to 25% on Chinese imports coming into the US. These imports are worth about $200bn.
In response to the possible hike in tariffs, the Chinese administration adopted a tit-for-tat approach. A spokesperson from the Foreign Ministry said that it would increase tariffs on US imports and America’s attempt at blackmailing China would not succeed.
A trader working at a bank in Singapore pointed out that the response by China indicates that the trade war between the two nations will go from bad to worse – and consequently the yuan will face long-term depreciation.
Traders privy to Chinese state-run banks have claimed that they are extremely active in the swaps market. However, they were unable to clarify whether the banks were using swaps to borrow the US dollars that they were spot selling.
With Chinese banks swapping yuan for dollars, it has helped the yuan value to increase beyond the spot values. On 8 August 2018, the one-year value of yuan was at 6.8374 for a dollar.
A trader from Shanghai stated that the large Chinese banks have not reduced the selling frenzy in the swap market even though the spot values of yuan were stabilising. This is proof that the Chinese authorities are trying to steady the currency and prevent it from rapid depreciation.
The fast sinking of yuan has sparked market rumours that there is a possibility in the near future that it will trade over 7.0 per dollar.
In late 2015 and 2016, it was common practice for Chinese banks to sell dollars in the forex market, and at that time traders believed that the authorities were trying to increase the value of the yuan. It is possible the same is happening now amid the ongoing trade war between China and the US.