The exchange rate is creeping closer to 7 yuan to the dollar, which is seen as a key psychological threshold for traders and could be the trigger for renewed attacks by US President Donald Trump.
“Investors will be thrown out of their comfort zone,” said Kevin Lai, a Hong Kong-based economist at investment bank Daiwa Capital Markets. “When it breaks seven, you’re going to see a lot more selling pressure.”
Sharp drops in the yuan can send shudders through China’s economy and financial markets. In 2015 and 2016, huge sums of money flooded out of China as investors bet the yuan would keep falling, forcing Beijing to spend hundreds of billions of dollars to prop up its currency.
But analysts at research firm Capital Economics argue the Chinese government may now be less worried about the risk of money pouring out of the country than it is about the yuan’s decline adding to tensions in the trade war with Washington.
“For those who are trying to short the renminbi, we fought hand to hand a few years ago, so we are very familiar with each other,” said Pan Gongsheng, deputy governor of the People’s Bank of China, in Beijing on Friday. “I think it’s still fresh in our memory.”
The central bank “is likely to intervene to keep the pace of depreciation gradual,” the Capital Economics analysts said. But they predicted the yuan would slip past 7 to the dollar soon.
Other economists said they expect the yuan to touch the 7 mark several times before it clearly moves past it, allowing investors to get more comfortable. That way, “it will not create any surprise to the market when it happens,” said Iris Pang, a China economist at Dutch bank ING.
Yong Xiong contributed to this report.
Source : Nbcnewyork
