The governor of the People's Bank of China said it would stabilize the yuan, which weakened to its lowest level in nearly a year amid growing worries over the U.S.-China trade row, helping to send the currency higher.
Governor Yi Gang said the central bank is "paying close attention" to foreign exchange market fluctuations and vowed to "leverage regulatory effects of macroeconomic prudential policies to maintain the basic stability of RMB exchange rate at a reasonable and balanced level."
Policymakers are "confident" that the yuan can be kept essentially steady, Bloomberg News quoted PBoC Deputy Governor Pan Gongsheng, adding that China's balance of payments are generally balanced and that the country has ample foreign reserves and policy tools.
The PBoC officials' remarks came as the yuan fell past the "psychologically significant" 6.7 to the dollar mark July 3, its weakest in a year, Reuters reported. The yuan has dropped by about 4.4% in the past month, and was up 0.28% to 6.65 to the dollar as of 6:09 a.m. ET.
Stocks also sank in early trade July 3 with the Shanghai Composite index dipping to as low as 2,722.45 before rebounding to close up 0.41% at 2,786.89 following Yi's statement. Investor jitters have pushed shares lower in the past month as Beijing and Washington look set to impose tariffs on billions of dollars' worth of products July 6.
Yi said the central bank will also continue to implement a "prudent and neutral" monetary policy and deepen reforms in exchange rate markets.
"It is a tricky moment for the PBoC," said James Knightley, chief international economist at ING, in a note. "On the one hand, it has to loosen monetary policy to safeguard against downside risks from trade, but it also has to tighten liquidity to fulfill its deleveraging target."
Knightley does not expect the central bank to raise its 7-day repo rate in the second half of 2018, but a further 50-basis-point cut in the reserve requirement ratios at the beginning of each quarter is likely. He forecast the yuan would end 2018 at 7.0 to the dollar.