By Kevin Yao
BEIJING (Reuters) – China is likely to use its vast currency reserves to stop any precipitous fall through the psychologically important level of 7 yuan per dollar as it could risk triggering speculation and heavy capital outflows, policy insiders said.
On Friday, the yuan <cny=cfxs>yuan hit a fresh 22-month low of 6.9647 against the dollar, and traders expected that the tightly managed, partially convertible currency would soon be testing 7 per dollar, a level unseen since the global financial crisis a decade ago.</cny=cfxs>
The yuan has lost over 6 percent versus the dollar so far this year, partly reflecting its slowing economy and pressure on exports due to an ongoing tariff war with the United States.
Two sources involved in internal policy discussions, but who are not the final decision-makers, said that a defense of the yuan at 7 per dollar would be mounted to show investors that the authorities wouldn’t allow a runaway market.
“If the yuan falls through 7, there could be a rapid depreciation of the exchange rate”, said one policy insider. “In order to avoid such a passive situation, the authorities are likely to step in the market to stabilize the yuan.”
The second source was certain the central bank would make a stand, rather than allow any sudden break through a psychologically important level to feed pessimism among investors.