China's national flag is seen in front of a poster explaining the design of new 100 yuan banknote at a branch of a commercial bank at a business district in Beijing, China, January 21, 2016. REUTERS/Kim Kyung-Hoon - RTX23C1S

Reuters

Yuan Slides to Lowest Level in Nearly Eight Years

China Dow Jones Newswires

The yuan fell to its lowest level against the dollar in nearly eight years Tuesday, continuing a recent drop that has accelerated since Donald Trump's victory in the U.S. presidential election.

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The value of one dollar rose as high as 6.8660 yuan in China's tightly controlled domestic market during the Asian trading morning, its highest point since Dec. 9, 2008, during the depths of the global financial crisis. The yuan's fall came after China's central bank set its daily reference rate for the currency at 6.8495 Tuesday, up 0.3% from the day before, marking the highest so-called yuan "fix" since Dec. 8, 2008. The yuan is allowed to trade 2% either side of the fix in mainland Chinese markets.

The Chinese currency ended Tuesday's trading in Asia at 6.8530 against the dollar, down from 6.8409 Monday.

The People's Bank of China has allowed the yuan to weaken for the last eight consecutive trading days, with the pace of depreciation picking up since Friday when the dollar intensified its global surge following Mr. Trump's election victory.

Mr. Trump was often critical of China's currency policy during the presidential election campaign, saying he would brand the country a "currency manipulator" when he took office, among other measures designed to combat China's alleged unfair trade practices.

Still, despite the looming Trump presidency, mainland traders said China's central bank appears content to let the yuan keep sliding for now, with the dollar strong against a number of global currencies.

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"Our impression is that the central bank is happily going with the flow and it appears to have abandoned a heavy-handed market intervention approach," said Liu Dongliang, senior analyst at China Merchants Bank.

"The PBOC stepped in only after the dollar breached 6.86 but the intervention isn't as forceful as it used to be and is meant to pre-empt undesirable panic in the market," said a Shanghai-based head of currency trading at a domestic bank.

The yuan's weakness has come amid even heavier losses for many other emerging-market currencies since Mr. Trump was elected. Concerns about rising U.S. interest rates and trade protectionism have hit the value of currencies from Mexico to Turkey and Indonesia.

"There's no point exhausting China's foreign reserves on defending the yuan when the dollar is surging internationally," Mr. Liu said.

Citing increased uncertainty over China's economy and currency policy posed by Mr. Trump's presidency, HSBC said in a recent research report that the bank has raised its forecast for the dollar-yuan exchange rate at the of this year to 6.90 from 6.80 and at the end of next year to 7.20 from 6.90, respectively.

Analysts say China's central bank may be happy to allow the yuan to fall to help Chinese exports remain competitive amid a broader economic slowdown.

But Beijing's stance on the yuan also reflects its recent shift toward managing the yuan with reference to a basket of currencies of its major trading partners.

"Despite the yuan's recent fall against the dollar, its value against the currency basket has in fact risen in the same period," said Shuang Ding, China economist at Standard Chartered Bank.

According to the latest data, the official yuan index compiled by the China Foreign Exchange Trading System, or CFETS, a subsidiary of the Chinese central bank that oversees all onshore currency trading, stood at 94.33 Friday, up from 93.78 a week earlier. The CFETS index reflects the yuan's performance against all the foreign currencies traded onshore, but on an undisclosed trade-weighted basis.

"At volatile times like this, the authorities are looking for an anchor to generate stability in the market and this index appears to be the one, " said Mr. Ding.

The Chinese authorities have attempted to direct investors' attention toward the strong performance of the yuan against the currency basket and away from the currency's slide against the dollar.

A commentary published on CFETS's website on Nov. 4 by a "special commentator" explained that the yuan's depreciation against the dollar was a natural move.

"While the yuan has depreciated against the dollar, its exchange rate against the basket of currencies has held basically stable and even appreciated slightly, which shows that the market in general has no worries about the yuan's exchange rate," said the commentary.

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