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Financials

China's yuan steady, stocks slip as investors weigh Phase 1 deal

* Offshore, onshore yuan strengthen about 0.1%

* Shanghai Composite index -0.28%, CSI300 -0.30%

* Analysts see trade optimism already priced in

SHANGHAI, Jan 16 (Reuters) - China’s yuan firmed a little while stocks fell on Thursday after Beijing and Washington sealed a Phase 1 trade deal, with financial markets taking on a cautious tone as many thorny issues remained unresolved.

The partial trade agreement signed on Wednesday still retained tariffs imposed by the two sides over the last 18 months and structural differences that led to the conflict were not addressed.

The yuan inched up 0.1% to 6.8848 per dollar around midday in China, on relief that the deal had finally been signed, and by a stronger central bank guidance rate.

The People’s Bank of China (PBOC) set the midpoint fixing for its daily trading band at 6.8807 per dollar on Thursday, its firmest level since July 26, 2019, and slightly stronger than the previous day’s fixing of 6.8845.

The yuan has rallied 2.8% since early December, lifted by the trade deal and other signs of easing tensions between Washington and Beijing. It touched a six-month peak of 6.8661 per dollar on Tuesday.

In the offshore market, the yuan also edged up about 0.1% from Wednesday’s close to change hands at 6.8868 per dollar around 0400 GMT. It had touched 6.8662 per dollar, its strongest level since July 26, on Tuesday.

Jacqueline Rong, senior China economist at BNP Paribas in Beijing said the currency pact in the Phase 1 trade deal largely matched market forecasts.

“The highlight of the currency agreement was that both parties should respect the other’s autonomy in monetary policy, and this has relieved previous market concern that China might pledge to keep the yuan at a certain range and restrict its own monetary policy maneuver.”

While the Phase 1 deal directs Beijing to maintain a market-driven currency, a trader at a Chinese bank in Shanghai said he does not think it will affect the country’s currency policy.

He expects the PBOC will still likely to use a counter-cyclical factor in setting each day’s midpoint fixing to reduce price swings in the yuan when needed.

Analysts at OCBC Wing Hing bank agreed that the impact of the preliminary deal was limited.

“Markets will be watching the timeline for reducing tariffs and the development of Phase 2 negotiations,” they said. “We feel that although Sino-U.S. trade talks will remain a driving factor, economic fundamentals will have a larger impact on the yuan in 2020.”

PROFIT TAKING

Chinese stocks, which also have rallied on optimism over a trade truce, showed little further enthusiasm on the deal’s signing. While the agreement has helped bolster shaky business confidence, it is only expected to give a modest boost to the cooling economy.

The benchmark Shanghai Composite Index, which has gained 7.6% since the end of November, stalled after opening higher and was 0.28% lower at the midday break. The blue-chip CSI300 index fell 0.30%.

A-shares have already factored in good news about the trade deal, and investors were cautious ahead of the week-long Lunar New Year holiday, said Zhang Gang, an analyst with China Central Securities.

The market could take a hit if heavyweight firms’ earnings disappoint, he said.

In Hong Kong, the Hang Seng also oscillated between small gains and losses. It was 0.07% lower at midday. The Hang Seng China Enteprises index was down 0.12%.

“Given the amount of speculation by the markets and commentary by officials ahead of Wednesday’s signing, it is unsurprising markets have not rallied too strongly upon final signing,” said Hannah Anderson, global markets strategist at J.P. Morgan Asset Management.

“Fundamentally, this deal does little to alter either the U.S. or Chinese economies,” she added, noting that tariffs remain high and key issues in the U.S.-China relationship “remain unaddressed.”

Benchmark Chinese 10-year government bond futures were little-changed, with the most-traded contract for March delivery up 0.01% at 98.545.

Reporting by Andrew Galbraith, Winni Zhou and Luoyan Liu; Editing by Kim Coghill & Shri Navaratnam

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