China to slow yuan’s slide to 7 per dollar

Currency has lost over 6% versus dollar this year, a level unseen since the financial crisis a decade ago

China is likely use its vast currency reserves to stop a precipitous fall through the psychologically important level of 7 yuan per dollar, as it could risk triggering speculation and heavy capital outflows, policy insiders said.

Yesterday, the yuan hit a fresh 22-month low of 6.9647 against the dollar, and traders expected that the tightly managed, partially convertible currency would soon be testing 7 per dollar, a level unseen since the global financial crisis a decade ago.

The yuan has lost over 6 per cent versus the dollar so far this year, partly reflecting its slowing economy and pressure on exports due to an ongoing tariff war with the United States.

Reining in the market

Two sources involved in internal policy discussions, but who are not the final decision-makers, said a defence of the yuan at 7 per dollar would be mounted to show investors that the authorities wouldn’t allow a runaway market.

“If the yuan falls through 7, there could be a rapid depreciation of the exchange rate,” said one policy insider. “In order to avoid such a passive situation, the authorities are likely to step in the market to stabilise the yuan.” The second source was certain the central bank would make a stand, rather than allow any sudden break through a psychologically important level to make investors pessimistic.

“The central bank will intervene — intervene directly or indirectly. It’s necessary. The central bank has many policy tools. We cannot let the yuan fall past 7, as it would have a psychological impact on people,” the second source said.

Beijing’s priority now is to ward off a sharper slowdown in the economy, which grew 6.5 per cent in the thirdquarter, the weakest since the global financial crisis.

The central bank, which has cut reserve requirements for lenders four times this year, is expected to ease monetary policy further, while on the fiscal side the government has pledged more tax cuts next year to support growth.