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SHANGHAI: China’s yuan slumped to a near two-year low against the dollar on Monday, as Beijing stepped up easing measures to arrest an economic slowdown at a time the US Federal Reserve was set to continue its aggressive monetary tightening campaign.

Widening policy divergence, along with worries over weaker economic fundamentals, raised the risks of capital outflows and yuan depreciation, currency traders said.

Yuan traded in both onshore and offshore quickly slipped after China cut its benchmark lending rate and lowered the mortgage reference by a bigger margin, adding to last week’s easing measures, as Beijing boosts efforts to revive an economy hobbled by a property crisis and a resurgence of COVID cases.

The onshore yuan opened at 6.8202 per dollar and touched a low of 6.8308, the weakest level since Sept. 25, 2020. By midday, it was changing hands at 6.8243, 73 pips weaker than the previous late session close.

China’s yuan rebounds off 3-month low on policy support expectations

Its offshore counterpart fell to a near two-year low of 6.8520 before trading at 6.8394 at noon.

Traders said the gap between onshore and offshore widened further to 151 pips in morning deals, a sign that depreciation expectations might have picked up as the offshore yuan trades more freely and better reflects market fundamentals.

“Overall, the RMB depreciation is the reflection of monetary policy divergence, interest rate differential and market pricing of bleak China growth outlook, instead of a cause of emerging market crisis,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

“We reckon that the People’s Bank of China (PBOC) will tolerate more RMB depreciation at this stage.”

Prior to market opening, the PBOC set the midpoint rate at 6.8198 per dollar, 133 pips or 0.2% weaker than the previous fix of 6.8065, the softest since Sept. 28, 2020.

“The unexpected slowdown in the economy in July was rather broad based and the PBOC could remain in easing mode as long as the economy is under pressure from zero-COVID strategy, weak property sector and more recently, power crunch in Sichuan and Chongqing,” analysts at Maybank said in a note.

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