China Says Yuan Breaks 7 on Tariff Threats, Vows Stability

(Bloomberg) --

China's central bank said the yuan broke through 7 to the dollar Monday due to the threat of fresh U.S. tariffs on Chinese goods, adding that it's ready to crack down on short-term speculation to keep the currency basically stable.

The yuan continues to be stable and strong against a basket of currencies, the People's Bank of China said in a statement. The central bank will continue to create new tools to take any necessary measures in response to the feedback loop in the yuan market, it said.

The move beyond 7 per dollar for the first time since 2008 comes amid speculation that Beijing is allowing the currency to depreciate to counter U.S. President Donald Trump's latest tariff threat. The exchange rate tumbled 1.3% to 7.0292 to the dollar as of 12:46 p.m. in Beijing, after the PBOC set its daily reference rate weaker than 6.9 for the first time since December.

“The first question, at this point, is whether China wants to weaponize its currency to retaliate in a messy trade war," Zhou Hao, an economist at Commerzbank AG in Singapore, wrote in a note. "Today's move suggests that China sees there is a need to allow more currency flexibility to counter the headwinds from the trade front."

Read More: China Lets Yuan Tumble Past 7 Per Dollar as Trade War Escalates

The yuan has “fundamental support” from a healthy economy, which features controllable financial risks, abundant reserves and a stable balance of payments, the central bank said. Yuan-denominated assets are undervalued as China is the only major economy that has maintained normal monetary policy, the bank said, adding that “China will likely become the pool of global capital.”

The PBOC said 7 per dollar isn't “an age that won't come back once passed," adding that it's normal for the exchange rate to fluctuate.

The PBOC said a market-driven exchange rate is an “automated stabilizer” that can offset shocks to the economy and cross-border capital flows, and the market will find a new equilibrium over time.

“At the moment the yuan can depreciate and it can also appreciate,” the bank said, advising companies to focus on their real business rather than seeking to profit by speculating on exchange-rate derivatives.

--With assistance from Miao Han.

To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at yzhao300@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Sharon Chen, Michael S. Arnold

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With assistance from Bloomberg