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By Ben Levisohn, barrons.com
The yuan tumbled overnight amid trade tensions with the U.S. before China’s central bank stepped in to calm investors.
The currency weakened to close to 7 against the dollar in early trading, but recovered to end the onshore trading day with a 0.2% gain. The U.S.-China spat escalated this week when the Trump administration threatened to raise the proposed tariffs on Chinese imports, and Beijing retaliated by saying it would place tariffs of its own on about $60 billion of U.S. products.
In an apparent response to the yuan’s decline, the People’s Bank of China said on Friday that it was requiring traders to place reserves with it equivalent to 20% of their positions to trade some foreign-exchange forward contracts, making it expensive to short the currency. Beijing introduced the 20% requirement in 2015 to help stabilize the yuan after Beijing unexpectedly devalued it. It set the requirement to zero in September, effectively removing it. Friday’s move represents a reinstatement.
During the post-devaluation crisis, the rule helped stem declines in the currency and reduced the incentive for investors to take money out of the country.
“Compared to 2015, this is a political issue. They want to create uncertainty and use the currency as a pressure tactic,” said Jean Ergas, chief economist at Tigress Financial Partners. He expects the yuan’s long-term fate will hinge on the trade war.
The Chinese currency has lost 6% in the past two months. Investors have speculated that the People’s Bank of China would encourage the decline to counter the impact of U.S. tariffs by making Chinese goods less costly overseas.
“By putting it back on, the central bank is signaling that it wants to slow yuan depreciation and is not weaponizing currency with regards to trade tensions,” Win Thin, global head of emerging-markets currency strategy at Brown Brothers Harriman, said of the reserve requirement.
A slowing economy and concern about the outlook for trade have been weighing on Chinese markets. The Shanghai Composite Index has been one of the worst-performing indexes this year, falling 20% in dollar terms. The MSCI Emerging Markets Index is down just 7% and the iShares China Large-Cap ETF (FXI) has fallen 8.8%.
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