China Struggles With Yuan
China’s effort to support its slowing economy is heaping pressure on the yuan, signaling challenges for Beijing as it tries to stimulate growth amid rising trade tensions without triggering destabilizing capital outflows.
The yuan weakened beyond 6.93 per dollar this week, coming within striking distance of its lowest level since January 2017, after China moved over the weekend to free more funds for domestic banks. The currency briefly recovered to around 6.91 in Tuesday trading in mainland China and Hong Kong after a short-term lending rate jumped.
Interbank lending rates in Hong Kong – an offshore trading hub for the yuan – surged on Tuesday, possibly due to efforts by China’s central bank to prevent the yuan from weakening too much, several analysts said.
China’s efforts to manage its currency are complicated by the escalating trade conflict between the U.S. and China, with the U.S. levying new tariffs on billions of dollars worth of Chinese imports and China retaliating with tariffs of its own. President Trump’s administration is seeking to press its advantage as China struggles to manage weaker economic growth, heightening pressure on President Xi Jinping to protect China’s economy and stature abroad.
The pace and scale of the yuan’s depreciation is a subject of recurring anxiety in global markets. For many investors, an essentially sanguine view centering on the country’s solid growth and low inflation is tempered by concerns about China’s efforts to manage its enormous debt load and keep the world’s second-largest economy running smoothly through an extended period of deceleration.
Those concerns are being amplified by the efforts of global central banks, led by the Federal Reserve, to tighten monetary policy and limit the prospects that healthy U.S. growth will lead to an overheated economy and a sustained increase in inflation.
Whenever Chinese officials step up their stimulus to the economy or provide unusual financing assistance to vulnerable sectors of the economy, as they did this week by reducing reserve requirements at some banks, the move raises concern among some portfolio managers and analysts about China’s markets and economy.
On Tuesday the overnight cost of borrowing yuan for Hong Kong banks jumped to 5 % from 1.745 % a day earlier, hitting its highest level since May. The rate for one-week lending reached 7.6 % Tuesday, up 4 percentage points since last week to its highest level in over a year.
Higher short-term rates make it more costly to bet against the yuan using borrowed funds. In the past, Chinese authorities have pushed interbank lending rates higher during bouts of deprecia-