Authorities prepared to deal with yuan swings

Monetary authorities are adequately prepared to deal with short-term fluctuations of the yuan amid lingering trade friction between China and the United States, economists said on Tuesday.

Authorities are expected to come out with concrete measures to safeguard the currency value after the onshore yuan hit the weakest level in four months on Monday, following tariff hikes on imports by both sides.

China increased tariffs on the bulk of its $60 billion worth of US imports to 10 percent, 20 percent and 25 percent, effective June 1.

On Tuesday, the yuan's daily reference exchange rate continued to slip, hitting 6.8365 per dollar, the weakest level since Jan 10. The spot exchange rate of the onshore yuan was allowed to fluctuate by 2 percent between the upper and lower level of the reference rate.

The yuan has depreciated by around 0.7 percent in the last two trading days. The depreciation was largely market driven, said a report from Goldman Sachs.

The friction will have some impact on the world's second-largest economy, but the foreign exchange market may prefer to avoid risks by choosing more safer investment targets, possibly shorting the yuan, said analysts.

The new tariffs and the rising tension have put downward pressure on the yuan, raising risks of volatility in the short term, Michael Taylor, managing director and chief credit officer for Asia-Pacific at Moody's Investors Service, told China Daily.

As one of the influencing factors, the ongoing trade negotiations between China and the US will continue to affect the yuan, Taylor said.

But it is not the only factor. Other economic drivers also include China's comparatively stable growth prospects vis-à-vis the rest of the world, US dollar fluctuations, and capital flows that are influenced by interest rate decisions in advanced economies, he said.

Policy watchers believe that China is ready to deal with possible or even the extreme scenarios, by re-evaluating different policy tools.

It is necessary to prepare for the worst-case scenario and fight for the best results, said Guan Tao, a former senior official with the country's foreign exchange regulator, the State Administration of Foreign Exchange. "Any policy choice has pros and cons, and there is no choice without pain," he said.

A "safe zone" for the yuan fluctuation is between 6.6 to 7 per dollar, said Zhang Ming, a researcher with the Chinese Academy of Social Sciences. Special measures could be used if it slipped out of control and for example puts stress on the country's capital flow management, he said.

The central bank has to balance between possible rising asset prices - as a result of further monetary easing, and the effect of a weaker yuan on exports, as a cheaper yuan could help exporters offset the impact of higher tariffs, said economists.

In a bearish scenario, which means the US and China trade tensions continue to worsen, measures to stimulate growth could be added to the Chinese central bank's tool kit, according to Robin Xing, Morgan Stanley's chief economist in China.

Those could include rate cuts for open market operations and the medium-term lending facility, higher infrastructure bond quota, and some loosening in property and shadow banking, he said.

The worst situation, in some economists' scenario analysis and stress tests, is both the US and China raise tariffs on the full range of imports. Even if that happens, China's GDP growth will not possibly fall below 6 percent this year, according to calculations from Morgan Stanley.