MK Tang, a senior China economist at Goldman in Hong Kong stated however, that while the authorities may guide sentiment by issuing stronger fixings, they are unlikely to sell the dollar heavily to defend the currency, as they did three years ago while facing a shock devaluation.
The reason for that was stated as the conditions being ‘more mature’ for the yuan to hit 7 in the present times, according to him.
“We see good economic reasons arguing for a weaker yuan, especially in the coming months,” Tang said. “It’s only a matter of time for the yuan to hit 7.”
The yuan has been under intense pressure to fall, during the ongoing US-China trade war. China itself has loosened its monetary policy in order to bolster a slowing economy. The currency touched its weakest level in more than a decade this week—spurring debate on when and whether it could slide to 7 for the first time since the global financial crisis.
Policy makers are also more likely to be averse to outright intervention due to the yuan being more liberalized in the past, according to Tang. He further stated that Chinese officials have been working to make the yuan more market-driven as they seek to attract more foreign investment.
Just how far the yuan can slide may depend on how much weakness the PBOC is willing to tolerate.In early 2017 when the currency was close to the current level, the authorities engineered a cash squeeze in the offshore market to punish bears. The latest sign of officials’ uneasiness came on Wednesday, when Hong Kong’s government said the Chinese central bank will issue bills in the city for the first time ever—in order to drain liquidity and support the yuan.
“It’s possible that outflows will pick up from September as the yuan continues to weaken,” Tang said, adding he sees the yuan weakening to 7.1 in the next six months.
“I expect policy makers to use capital controls more proactively to manage outflows pressures.” He further added.
The onshore yuan climbed for the first time in four sessions, rising 0.14% percent to 6.9644 per dollar. That came after the People’s Bank of China set its daily reference rate at a level that was stronger-than-expected.
The offshore rate erased a loss to gain 0.05%.