(Updates prices, adds comments and details)
SHANGHAI, May 22 (Reuters) - China’s yuan finished domestic trading at a more than 8-1/2-month low on Friday, as market sentiment soured after Beijing moved to impose a new security law on Hong Kong that risked worsening already strained U.S.-China ties.
The spot yuan ended its onshore session at 7.1416 per dollar, the weakest such close since Sept. 5, 2019.
China kicked off its annual meeting of parliament on Friday, with markets paying close attention to the government’s annual work report, which usually sets out the overall economic policy stance and priorities for the year.
Some traders and analysts said they were surprised Beijing announced plans for the new national security law for Hong Kong at the National People’s Congress (NPC).
The yuan’s weakness also came as Beijing dropped its annual growth target for the first time since the government began publishing such goals in 1990.
“Although the government report has reiterated to forcefully implement macro policies to keep businesses and employment stable, investors who bet on massive fiscal stimulus may be disappointed as China’s current rescue package as a percentage of GDP is much smaller than the world norm of 10%,” Tommy Xie, economist at OCBC Bank in Singapore, said in a note.
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 7.0939 per dollar, 71 pips or 0.1% weaker than the previous fix of 7.0868.
Market participants said the majority of Premier Li Keqiang’s work report on economic stimulus was widely expected.
“The work report came in largely matching my expectations, without upside surprises,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong.
“Sentiment soured on deteriorating U.S. labour market and escalating China-U.S. tensions...China’s move to enforce the national security (law) for Hong Kong at the National People Congress triggered Trump’s warning on the strong response to the issue.”
U.S. President Donald Trump has warned that Washington would react “very strongly” against attempts to gain more control over the former British colony.
Cheung said the yuan was expected to rebound to 7 per dollar by the end of the second quarter, despite higher volatility.
“Sino-U.S. relations will continue to be a key concern, but we don’t see huge fundamental issues with the yuan,” he said.
China was targeting a 2020 budget deficit of at least 3.6% of GDP, above last year’s 2.8%, and fixed the quota on local-government special bond issuance at 3.75 trillion yuan up from 2.15 trillion yuan.
The offshore yuan also softened, trading at 7.1635 per dollar as of 0853 GMT, the weakest since March 19. (Reporting by Winni Zhou and Andrew Galbraith; Editing by Jacqueline Wong)