(Yicai Global) Aug. 18 -- The offshore exchange rate of the Chinese yuan to the US dollar, which is traded outside the mainland, has tumbled about 1 percent to hover around 6.81 since the People’s Bank of China took the market by surprise and slashed lending rates by 0.1 percentage point earlier this week.

The PBOC trimmed the interest rates for the one-year medium-term lending facility and seven-day reverse repurchase operations on Aug. 15 to boost liquidity in a slowing economy. As central banks around the world hike interest rates, the rate cut was unexpected and triggered a wave of sell-offs in offshore foreign exchange markets. That day, the offshore Chinese yuan sank almost 700 points to 6.8163.

Future overseas trade will determine how the yuan exchange rate moves, said Xie Yunliang, chief macro analyst of Cinda Securities, said. As commodity prices rise overseas, Chinese exports will become more attractive. In the short term, a controllable decrease in exports can be expected this year.

It is difficult for the yuan to strengthen as the US dollar index, which is the value of the greenback relative to a basket of foreign currencies, is still above 106 and liquidity on the mainland is unusually loose, a trader at a state-owned bank told Yicai Global.

“There may still be some pressure on the yuan,” Matt Simpson, senior analyst at Jiasheng Group, told Yicai Global. “In the past few weeks, China has released some economic data which has fallen short of expectations, and the US-China spread has also put some stress on the redback.”

Foreign Trade

If international trade can keep up the pre-July momentum, this may hedge against this part of the overvaluation, and keep exchange rates steady, the trader said.

Foreign trade throughput in China’s eight main ports gained by just 0.2 percent from Aug. 1 to Aug. 10 compared with a year earlier, Lu Ting, chief economist at Japanese financial services group Nomura Holdings’ China division, said recently. This was a huge drop from growth of 29.3 percent in the 10 previous days, from July 21 to July 31. Exports expanded 9.8 percent in July, down from June’s 15.1 percent.

Since the start of the year, the export quantum index, which measures the volume of exported goods, has remained below the export price index, Xie said. Although the export quantum index rose in May and June, showing greater-than-expected resilience, it was not as high as the price index.

Liquidity Boost

“The PBOC lowered the MLF rate to encourage banks to further reduce the financing costs of the real economy, so as to revitalize smaller players and help the recovery of consumption and investment,” Zhou Maohua, macro analyst at Everbright Bank, told Yicai Global earlier.

New Chinese yuan loans tumbled 37 percent in July from the same period last year to CNY679 billion (USD100 billion), while social financing shrank 29 percent to CNY756.1 billion as demand for financing remains weak, according to data released by the PBOC on Aug. 12.

Editor: Kim Taylor