U.S. banknotes and Chinese yuan notes.
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China’s central bank set the official midpoint reference rate for the yuan at 7.0326 per dollar on Tuesday, stronger than what analysts were expecting.
It was the fourth consecutive session where the People’s Bank of China fixed the midpoint at a level weaker than the psychologically important 7-yuan-per-dollar level.
Analysts were predicting the midpoint to be set at 7.0421 per dollar after the yuan last traded at 7.0578 in Monday’s session, according to Reuters estimates.
The yuan has become a focal point among investors because of the ongoing trade war between the United States and China, which escalated earlier this month when President Donald Trump said the U.S. is putting 10% tariffs on another $300 billion worth of Chinese goods starting Sept. 1.
The PBOC lets the spot rate trade with a range of 2% above or below the day’s official midpoint fix and this is known as the onshore yuan. The less restrictive exchange rate used outside mainland China is known as the offshore yuan. Investors usually look at the difference between the onshore and offshore exchange rates to determine if the Chinese central bank is willfully manipulating the yuan.
The yuan depreciated past 7 per dollar last week for the first time since the global financial crisis of 2008, which prompted the U.S. Treasury Department to designate China as a currency manipulator. A weaker currency makes a country’s exports cheaper and the Trump administration has consistently complained that a cheaper yuan will give China a trade advantage.
Since the end of July, the onshore yuan weakened more than 2.5% while the offshore rate fell 2.81%. The offshore yuan last traded at 7.0959 against the greenback at 8:58 a.m. HK/SIN on Tuesday.
“The recent sudden devaluation of the (yuan) sounds like a deja vu and brings us to review the August 2015 experience,” Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis, wrote in a note dated Aug. 12. “This is in line with our view that there is no point of defending a psychological level under the priority of growth.”
Garcia Herrero said that given the risk of additional tariffs from the U.S. and China being labeled a currency manipulator, the Chinese currency, which is also known as the renminbi, is “likely to face higher depreciation pressure and hence potential capital outflows.”
“We believe that a large depreciation will be avoided as it will push too much capital out of China and put further constraints on liquidity, and thereby growth,” Garcia Herrero said, adding in the onshore market, volatility will be guided by a gradual change in the daily midpoint fix. In the offshore market, “the liquidity pool is much smaller and more China’s central bills will be issued to mop up the liquidity to avoid speculation.”
— Reuters and CNBC’s John Schoen contributed to this report.
