(Bloomberg) -- China’s yuan is sliding anew and the People’s Bank of China seems inclined to let it go.

The currency traded in Shanghai weakened to 7.31 per dollar, the lowest since December 2007. That’s after the PBOC set the daily yuan fixing at a 14-year low. The yuan also fell to the lowest in more than a year against a basket of its trading partners’ currencies, a Bloomberg gauge shows.

What was already a tough year for China investors looks to be turning into something much worse with overseas-listed stocks in freefall, the offshore currency at a record low and the domestic yuan threatening to break its tightly-managed trading band. A leadership reshuffle giving President Xi Jinping unchallenged control risks reigniting a debate that the world’s second largest economy is uninvestable.

 

“The authorities are allowing the yuan to adjust after trying to cap it during the Party Congress” and the question is how far will it let the yuan go, said Khoon Goh, head of Asia Research at Australia & New Zealand Banking Group, “a weaker yuan will have some spillover impact on other Asian currencies.”

The central bank loosening its grip on the yuan is in contrast with the Bank of Japan which is intervening to rescue the yen. Losses in the yuan and yen are adding to the downward pressure on Asian currencies that are already weighed down by their widening rate gap with the US.

The PBOC’s move to ease its tight-ranged fixing following the party congress was predicted by around 90% of the 30 yuan traders who responded to a Bloomberg survey last week. Half of the respondents said they expected the yuan to be pushed to 7.4 or even 7.5 per dollar within the year, and only 10% saw it at around 7.25.

On Monday, the onshore yuan came the closest to breaching the weak end of the trading band since 2015. However, it pared some of its intraday losses Tuesday after Chinese stocks rebounded from a historic selloff and inflows into mainland stocks by global investors via a Hong Kong link resumed. The Hang Seng China Enterprises Index advanced more than 2% after Monday’s 7.3% plunge that pushed the gauge to the lowest since 2008.  

China Measures

China has taken several measures to slow the yuan’s depreciation but the onshore currency remains on track for the worst annual loss since 1994. The PBOC has set a string of stronger-than-expected yuan fixings, added to the onshore supply of foreign exchange and made it more expensive for traders to short the yuan via derivatives.

Right before the PBOC released its fixing on Tuesday, the central bank tweaked a policy to make it easier for companies to seek funding offshore, effectively allowing more capital inflows. However, the higher cost of offshore financing is likely to keep a lid on overseas fund-raising and limit its impact on the yuan, said Wang Zhiyi, chairman of Shanghai Fang Chang Information Development Co., a financial research firm in China. 

The PBOC’s Deputy Governor Pan Gongsheng reaffirmed a pledge late last week to keep the yuan “stable on a reasonable and equilibrium level,” and vowed to push forward exchange-rate reforms. The central bank said in an article earlier this month that the currency “will achieve equilibrium by itself as supply and demand play a decisive role,” in an indication of its reluctance to intervene heavily.

“The central bank is allowing more market forces to drive the direction of dollar-yuan,” said Ju Wang, head of greater China FX & rates strategy at BNP Paribas SA, adding that historically the yuan is usually a late comer to the strong dollar cycle. “When yuan’s weakness starts to accelerate, we are already not far from the peak of Fed hawkishness,” she said.

--With assistance from Qizi Sun.

(Updates yuan move in second paragraph.)

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