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SHANGHAI: The yuan weakened slightly against the dollar on Tuesday, as fresh COVID-19 outbreaks, property sector woes and geopolitical tensions clouded the outlook for China’s economy, even as exports remained brisk.

In the onshore market, the yuan was changing hands at 6.7562 at midday, 54 pips weaker from the previous late session close, despite a firmer midpoint rate set by the People’s Bank of China.

Parts of Tibet are running mass COVID-19 testing on Tuesday, including the Chinese autonomous region’s two largest cities, to fight a rare flare-up there, while clusters of infections were growing in tropical Hainan and in Xinjiang in China’s west.

Lingering concerns over China’s property sector, and Sino-U.S. tensions over Taiwan also dampened market sentiment.

Angered by U.S. House Speaker Nancy Pelosi’s visit last week to self-governed Taiwan, China’s military has conducted drills around the island which Beijing regards as its sovereign territory.

China’s military said on Tuesday that it continued to hold military drills and exercises in the seas and airspace around Taiwan, with a focus on blockades and resupply logistics.

China’s yuan subdued despite strong exports, yield gap widens

“The COVID spread, property sector rout and Taiwan tensions will likely keep the RMB under pressure in the near term,” wrote Ken Cheung, Chief Asian FX Strategist at Mizuho Bank Ltd. RMB is yuan’s official name.

He added that the U.S. Federal Reserve “is unlikely to slow down its pace of rate hikes significantly even in case of moderating inflationary momentum.”

Higher U.S. interest rates would reduce the appeal of Chinese assets, potentially putting downward pressure on the yuan.

China’s unexpectedly strong exports in July provided some support for the yuan, however.

“A wider trade surplus in July points to a more supportive contribution of net exports to Q3-22,” wrote Swiss Bank UBP.

“The latest export figures from China may also help to ease some concerns about falling global demand. However, any respite will be short-lived.”

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