China’s currency is poised for its worst month on record after weakening beyond the barrier of 7 yuan per US dollar

The Chinese currency has plummeted 3.9 per cent this month, the biggest loss since January 1994, when the modern exchange rate regime was adopted

The slump past the 7 level for the first time since the financial crisis comes as US-China trade tensions escalate

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A clerk counts banknotes at a bank outlet in Hai'an in Jiangsu province on 6 August 2019. Photo: EPA-EFE

Published: 3:18pm, 27 Aug 2019Updated: 3:51pm, 27 Aug 2019

China’s yuan is headed for a record monthly plunge as an intensifying trade war with the US damages investor confidence.

The currency has plummeted 3.9 per cent this month, the biggest loss since January 1994, when the modern exchange rate regime was adopted. The slump past the 7 level for the first time since the financial crisis comes as US-China trade tensions escalate. Fresh signs of a slowing economy and bets on further monetary easing have also helped fuel the retreat.

Without any clear signs of progress in trade negotiations, the “outlook will deteriorate, both for the Chinese economy and markets,” Dariusz Kowalczyk, senior emerging market strategist at Credit Agricole, wrote in a note dated Monday. The yuan may decline in the near term to 7.3 per dollar, he said.

There are signs the People’s Bank of China is growing uncomfortable with the yuan’s drop. It set the daily reference rate at stronger-than-expected levels for a fifth straight session on Tuesday. Sustained weakness risks creating a cycle of capital outflows and more currency weakness, a scenario that may lead to financial instability.

The yuan plunged to the weakest level since February 2008 this week after President Donald Trump and the Chinese government exchanged tariff threats on Friday.

The PBOC may allow the currency to slide to 7.5 by the end of this year as it uses depreciation to counter the tariffs, Bank of America Merrill Lynch strategists led by Claudio Piron wrote in a note. The currency slipped 0.14 per cent to 7.1621 a dollar as of 11:55am in Shanghai.

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