China's yuan weakens as new lending tool points to further easing

SHANGHAI/HONG KONG: The yuan weakened on Thursday after China's central bank introduced a targeted lending measure to support growth in a slowing economy, and as the dollar stabilised after the US Federal Reserve lifted interest rates.

By midday, the onshore yuan was trading at 6.9079 per dollar, 0.2 percent weaker than the late session close, having earlier weakened to 6.915 per dollar.

The People's Bank of China (PBOC) had set the midpoint of the yuan's daily trading band at 6.8936 per dollar prior to market open, weaker than the previous fix of 6.8869.

On Wednesday, the PBOC rolled out a policy tool to spur lending to small and private firms. The targeted medium-term lending facility (TMLF) is the PBOC's latest step to support a slowing economy amid a trade dispute with the United States.

"(The TMLF) does not amount to a rate cut, but it expressed a view - that they are prepared to ease further. They are certainly not deleveraging anymore," said a trader at a foreign bank in Shanghai.

But the central bank chose to keep short-term borrowing rates steady on Thursday as it injected a net 150 billion yuan into money markets through seven- and 14-day reverse repurchase agreements.

"There seems to be significant determination to maintain currency stability because of the ongoing trade negotiations and concerns about the effects on the financial markets and economy. Lowering interbank interest rates would put additional pressure on the currency," analysts at Goldman Sachs said in a note Thursday.

The analysts characterised the TMLF as a "small additional loosening measure" that allows commercial banks to lower lending rates by lowering their cost of funding.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis edged up to 93.47 from the previous day's 93.45.

The dollar index, which measures the greenback against a basket of major rivals, was less than 0.1 percent weaker at 96.980.

Offshore, the yuan was trading slightly weaker than the onshore currency at 6.9095 per dollar, amid loose market liquidity.

The one-year interbank borrowing rate for offshore yuan fell to 3.89733 percent, its lowest since August. The Shanghai-based foreign-bank trader said the lower rate likely reflected expectations for further policy loosening in China.

Offshore one-year non-deliverable forward contracts (NDFs) traded at 6.9389, about 0.4 percent weaker than the offshore spot rate, showing continued investor expectations for a softer yuan.