PBoC sets higher daily yuan fix even after China named 'currency manipulator'

China's central bank acted to avoid further yuan weakness on Tuesday, just hours after the US Treasury labelled the country a "currency manipulator".

The People's Bank of China set the daily fix for China's currency, the yuan, at 6.9683 against the US dollar, which was stronger than the 6.9736 midpoint that Reuters had anticipated.

In response, as of 0832 BST the US dollar was down by 0.21% versus the yuan at 7.0360, having reached an intra-session high of 7.0602 during the session.

The critical question was whether the PBoC's actions meant that Chinese authorities would not escalate further, at least at the current stage.

America's decision to name the People's Republic of China a currency manipulator was unlikely to result in formal penalties with the US now expected to make its case to the International Monetary Fund.

"The labelling is primarily symbolic given the new tariffs already in place, but the move is certainly yet another escalation of the trade war and markets reacted negatively to the move," said analysts at Danske Bank.

Anticipating a drop in the yuan to 7.20 in six months' time, Danske said it was unlikely that Beijing would resort to weaponising its currency.

Just the day before, China had allowed the yuan to weaken past the psychological 7.0 yuan level against the Greenback for the first time since 2008, alongside an even larger drop against the euro, and announced that state-owned enterprises had been instructed to halt purchases of US agricultural goods.

The PBoC attributed the drop in the currency to the unilateral protectionist measures adopted by some countries and said explicitly that the central bank would not pursue a competitive devaluation of the yuan.

But multiple analysts believed that China had allowed that weakness to occur on purpose, possibly as a sign of defiance.

Those moves from policymakers in Beijing followed the US administration's announcement four days before to levy a 10.0% tariff on $300.0bn-worth of Chinese exports, on top of the other $300.0bn of goods that were already subject to a tariff of 25.0%.

President Donald Trump had based his decision on the lack of progress at a meeting between US and Chinese trade officials on 30 July and, by his own account, China's failure to follow-through on a promise to increase its purchases of agricultural goods.

Among those more sympathetic to Beijing's arguments, Freya Beamish at Pantheon Macroeconomics said the depreciation in the yuan "was not exactly a retaliation, [although] Mr. Trump unsurprisingly sees it as one, judging by his most recent tweets."

Beamish also attributed the "massive drop" in demand for soybeans to the widespread pig culls in China on the heels of the African swine flu epidemic.

As an aside, according to analysts at Capital Economics, Trump's decision last Thursday would suffice to begin eating away at China's trade surplus, unlike up until now.

For their part, analysts at HSBC said: "We have long argued that the US and China have a lot of common ground and should be able to reach a mutually satisfactory deal. But finding that common ground relies on good will, which is continuously being chipped away by escalating tensions.

"There is now a real risk that the trade war could last well into next year, escalate further along the way, without a realistic resolution in sight. It is possible that the working level dialogue and high level meeting in September may not happen. It is also possible that these meetings go ahead but do little to change the trajectory of the trade war."