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China expresses 'deep regret' over currency manipulator label, acts to back yuan

The Chinese central bank expressed "deep regret" over the U.S. decision to label China a currency manipulator and stepped in to contain the weakness in the yuan, which depreciated below 7 per dollar for the first time in more than a decade Aug. 5.

The yuan exchange rate is determined by market forces, the People's Bank of China said, adding that the depreciation in the currency since the beginning of August reflects shifts in market dynamics and foreign-currency volatilities amid escalating trade frictions.

The U.S. move will increase financial market volatility and obstruct international trade, while ultimately hurting the self-interests of the U.S. camp, the central bank said Aug. 6.

"China has never used and will not use [the yuan] exchange rate as a tool to deal with the trade frictions," the central bank said.

The People's Bank of China on Aug. 6 set the yuan's daily reference rate at 6.9683 per dollar, below the level market participants were expecting, Bloomberg News reported. The central bank set the rate at 6.8996 per dollar on Aug. 5. The onshore yuan can trade up to 2% above or below the PBoC's daily reference rate.

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The central bank has been intervening indirectly in the foreign exchange market via the daily yuan fixing, but with the intention to reduce the depreciation pressure on the currency rather than amplifying it, said Julian Evans-Pritchard, senior China economist at Capital Economics.

The timing of the yuan breaching the 7 per dollar threshold in light of further tariff threats from U.S. President Donald Trump has given credence to the idea that China is weaponizing its currency amid the trade war with the U.S., Evans-Pritchard added.

Separately, the PBoC also announced it will issue two batches of yuan-denominated bills in Hong Kong on Aug. 14, worth a total of 30 billion yuan.

While the yuan bill sales are part of a regular issuance, "the amount is larger than needed to simply replace maturing bills, so should provide some boost to short-term Chinese rates, and thereby to the [yuan]," according to Robert Carnell, ING Research's chief economist and head of research of Asia-Pacific.

Therefore, it appears that the central bank is trying to put the brakes on the currency's move from yesterday and bring back some two-way risk to the yuan's outlook, Carnell added.

The yuan was down 0.3% to 7.0310 against the dollar as of 4:48 a.m. ET on Aug. 6.