(Yicai Global) June 21 -- The Chinese yuan briefly depreciated beyond the level of 7.2 to the US dollar in offshore trading this morning for the first time since the end of November after China’s central bank cut the key lending rate for the first time in 10 months.

The yuan also depreciated by 200 points to 7.1987 versus the dollar in onshore trading at one point today. It has retreated almost 3.5 percent against the greenback in onshore trading this year and 4 percent offshore.

The People's Bank of China yesterday lowered the one-year and over five-year loan prime rates by 10 basis points to 3.55 percent and 4.2 percent, respectively, to help stabilize investment, consumption, and economic growth.

The wide China-US interest rate spread, the low willingness among exporters for foreign exchange settlement, and the foreign currency buying of offshore-listed Chinese firms for dividend payments, mainly in July and August, have all led to more intense seasonal pressure on the yuan.

The market also expects the US Federal Reserve to hike rates just once or twice more from next month, after it held off raising rates at its meeting this month.

“Positive changes have already occurred to internal and external factors, including economic outlooks and the US Dollar index,” according to the latest research note by China International Capital Corporation, the country's largest investment bank. “This will help the yuan exchange rate to eliminate earlier weaknesses.

“But since negative factors such as the China-US inverted interest rate gap and seasonal forex purchases are still present, we expect the yuan exchange rate to remain stable at a lower level for some time and bottom out in the future,” it added.

There were concerns that the LPR cut would cause the China-US rate gap to invert further and put the redback under short-term pressure. But according to CICC, the cut is not entirely bad for the yuan because it may lift expectations for the Chinese economy and lead to more growth-stabilizing policies, thereby boosting yuan asset prices and the exchange rate.

China’s government is expected to unveil a stream of policy support after the LPR cut, Lu Ting, chief China economist at Nomura, told Yicai Global. But the effects are not guaranteed since confidence and sentiment remain to be boosted, and the government faces fiscal pressure due to falling income from auctioning land use rights, with transmission channels still obstructed, Lu noted.

According to leading institutions, a number of government policies and measures may be unveiled by the end of next month. But significant fiscal policy support and changes in economic policy are unlikely before the high-level meeting of the Politburo at the end of next month.

Editor: Martin Kadiev