China's cbank will not let yuan decline past 7 to the dollar - sources

SHANGHAI/BEIJING, May 17 (Reuters) - China’s central bank will use foreign exchange intervention and monetary policy tools to ensure the yuan does not weaken past the 7-per-dollar key level in the immediate term, three people familiar with the central bank’s thinking said.

“At present, rest assured they will certainly not let it break 7,” a source told Reuters.

“Breaking 7 is beneficial to China because it can reduce some of the effects of tariff increases, but the impact on our renminbi confidence is negative and funds will flow out,” the source said.

The yuan, or renminbi, fell to its weakest level since December on Friday, and to within striking distance of the 7 mark last seen during the 2008 financial crisis.

It has weakened 3 percent in the past month on fading hopes of a deal being struck in the long-running trade war between Beijing and Washington. The latest flare-up in those tensions saw U.S. President Donald Trump increase tariffs on Chinese imports, provoking a similar tariff rise from China.

Although a weaker yuan would support Chinese exporters, the decline would need to be significant to offset the impact of higher U.S. tariffs. Such a fall could in turn fuel capital flight and undermine China’s economic stability, policy insiders said. The source told Reuters that China’s issue of central bank bills in Hong Kong this week was a clear indication of the People’s Bank of China’s intent to soak up offshore yuan and discourage investors from short-selling it.

The PBOC did not immediately respond to Reuters’ request for comment.

A second source familiar with the PBOC’s thinking said the monetary authority would be fine with the yuan weakening to 7 on fundamental factors but would act to prevent speculative short-selling of the currency. (Additional reporting by Swati Pandey in SYDNEY; Writing by Vidya Ranganathan in SINGAPORE; Editing by Sam Holmes)