China's yuan weakens after signs of stability calm markets

China's currency weakened again on Wednesday after hopes among financial traders that its decline was stabilising helped to calm jittery global markets.

The yuan edged down to 7.0488 to the US dollar, about 0.4 percent below its level late on Tuesday. The currency strengthened slightly to 7.0443 to the dollar in the afternoon but still was below the previous day's level.

Financial markets tumbled after Beijing allowed the yuan to fall Monday to an 11-year low against the dollar, breaking through the politically sensitive level of seven to the US currency. Washington responded by declaring officially that China improperly manipulates its exchange rate, opening the way for possible sanctions.

On Tuesday, central bank officials told foreign companies "the yuan will not continue to depreciate sharply in the future," the bank press office said in a statement. It gave no details but said "two-way fluctuation" of the currency "will become the norm in the future."

Tension over currency adds to a sprawling US-Chinese fight over Beijing's trade surplus and technology policies that companies and investors worry will chill global growth.

Tricky ground

The yuan's moves over the past week are small compared with fluctuations of the euro and other major currencies.

But Washington complains the yuan is too weak, making China's export prices unfairly low and swelling its trade surplus. That makes any decline politically volatile.

The People's Bank of China sets the yuan's exchange rate each morning and allows it to rise or fall two percentage points during the day. It can intervene and buy or sell currency — order Chinese commercial banks to do so — to guide the exchange rate.

The bank lowered the opening level for trading on Tuesday, but traders were encouraged when it was slightly higher than they expected.

That, plus a central bank statement late Monday promising to keep the currency stable, helped to fuel hopes the decline had stopped.

On Wednesday, the central bank lowered the starting point for trading again, setting it at 6.9996 to the dollar, almost 0.5 percent below Tuesday's starting level. That would allow the yuan to slide to below 7.1 to the dollar while staying within the trading band.

The central bank told companies the slide will stop, "but they haven't seen that today," Chris Weston of Pepperstone said in a report. "This is again proving central to moves across markets in Asia."

Stock market benchmarks in Tokyo and Hong Kong fell 0.8 percentage points. Seoul was off 0.2 percent.

The Chinese central bank showed it can "steer global markets" and "quickly weaken" the yuan if needed to offset US tariff hikes, Stephen Innes of Oanda said in a report.

"This is about China proving a point," Innes said. "They have a brawny tool at their disposal."

Trade spat a thorn in China's side

President Donald Trump's punitive tariffs on Chinese products have added to downward pressure on the yuan by prompting concern about a slowdown in the world's second-biggest economy.

Last week, Trump stepped up their fight by threatening to hike tariffs on an additional $300 billion of Chinese goods, effective September 1.

That came after the latest round of talks aimed at ending the tariff war concluded in Shanghai with no sign of a deal. Negotiators are due to meet again in September in Washington.

Economists say if the September 1 tariff hike goes ahead, the dent in Chinese exports and economic growth could weaken the yuan to as low as 7.2 to the dollar.