SHANGHAI: China's yuan weakened on Wednesday, weighed by an escalation in Sino-U.S. trade tensions and the central bank's move to set its official midpoint at an 11-year low, although state bank transactions in the swap market helped slow the decline.

Washington's move earlier this week to brand China a currency manipulator, for the first time since 1994, pushed the offshore yuan to a record low and the onshore currency past the seven to dollar mark for the first time in 11 years.

While efforts by authorities on Tuesday to stabilize the yuan pulled it away from the lows, fragile investor sentiment kept it under pressure on Wednesday.

The yuan's losses were capped after major state-owned banks were seen active in both onshore and offshore forwards markets,using swaps to tighten dollar supply, sources told Reuters, in an apparent attempt to guide market expectations and avoid panic.

“The hope for a quick turnaround of the trade war wanes given China's character of never giving in to pressure and aggressive push," wrote Tommy Xie, Head of Greater China Research at OCBC Bank.

“We cannot rule out the risk that the Trump Administration may increase the tariff further on Chinese imports to 40%, which may further weigh down on RMB."

The spot market opened at 7.0369 per dollar and was changing hands at 7.0458 at midday, 208 pips weaker than the previous late session close, after the People's Bank of China (PBOC) set the midpoint rate at 6.996 per dollar, the lowest level since May 15, 2008.

China let the yuan fall beyond the psychologically important seven to the dollar level on Monday, after U.S. President Donald Trump threatened fresh tariffs on Chinese exports.

Several yuan traders said investors are now closely watching the PBOC's daily yuan midpoint setting, which is widely read as Beijing's official stance on the currency.

“If tomorrow's fixing is set beyond the (seven to the dollar) threshold, it will certainly send a new depreciation signal and may prompt another round of falls in the yuan," said a trader at a Chinese bank in Shanghai.

Analysts and traders also say heightened trade tension is adding downward pressure to the Chinese unit, as growth prospects dim for the world's second-biggest economy.

Trump announced last week he would slap a 10% tariff on a further $300 billion in Chinese imports starting on Sept. 1.

Beijing warned that Washington's move to designate China a currency manipulator would have severe consequences for the global financial order. On Tuesday, PBOC said China “has not used and will not use the exchange rate as a tool to deal with trade disputes."

The global dollar index fell to 97.516 at midday from the previous close of 97.63.

Copyright Reuters, 2019