(June 13): The yuan is likely to drop below the level of seven yuan to a US dollar within three months, and the stock markets in mainland China and Hong Kong are gradually pricing in this scenario, Chinese state-owned lender Bank of Communications International said on Wednesday.
Hong Hao, the bank’s head of research, said: “The three-month tenure estimate is basically based on the positions we can see built by foreign-exchange traders for now. A weakened valuation of the yuan is decided by the recent tough trade environment China is facing.”
China faces rising tariffs imposed by the Trump administration, and last week the governor of its central bank, the People’s Bank of China, Yi Gang, said there was no “red line” for the exchange rate of the yuan against the US dollar.
This statement triggered fresh speculation among investors about Beijing’s willingness to weaken its currency to offset US tariffs.
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, on the sidelines of the G20 finance leaders’ meeting in Japan. He said Beijing had stopped intervening in the market of late, thus intentionally devaluing the yuan.
Analysts including Hong, however, said they believed the Chinese central bank had no intention of sharply weakening the currency, especially since trade talks between Washington and Beijing were still ongoing.
“I do not know what he [Mnuchin] is talking about,” said Iris Pang, economist at ING Greater China. “The PBOC has been fixing the midday price stronger than 6.9 against the US dollar recently. And we all know the currency can move only by two percentage points from that based on a trading band,” she said.
“Moreover, if the yuan falls on a trading day, the PBOC tends to strengthen the mid price the next day. I don’t know what intervention is if this is not it. This is a clear signal that the PBOC wants stabilisation more than anything,” she said.
On Tuesday morning, the central bank said it would issue a new batch of bills in the offshore market at the end of this month. This “is widely being seen as a gesture to warn the ‘China bears’ to step away from shorting the offshore yuan, as the PBOC can squeeze offshore liquidity, thus raising the cost of shorting Chinese currency”, said Zhou Hao, economist at Commerzbank.
He said he expected Beijing to keep the yuan stronger than the threshold of seven yuan to a US dollar at least ahead of a possible meeting between presidents Xi Jinping and Donald Trump later this month.
The stock markets in mainland China and Hong Kong had priced in a baseline scenario of a break down in trade talks, but not yet tariffs on another US$300 billion worth of Chinese exports, Bocom International’s Hong said.
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“The overall sentiment is too pessimistic for now, in my opinion, which means any upside news headline can lift the market. It is also a good opportunity for investors to dig in for bargains,” he said.
For the Hong Kong market, the Bocom International research team gave an “Outperform” recommendation for the insurance, health care, aviation and internet sectors, the latter led by Meituan. The team remained cautious about sectors such as banking, technology, property and automobiles.