China's yuan drops below key level on U.S. tariff threats, stocks recover

SHANGHAI (Reuters) - China's yuan weakened past a key level against the dollar on Thursday, following the central bank's weakest fixing in nearly a year after Washington's fresh tariff threats knocked the currency lower, although stocks clawed back heavy losses.

The Shanghai Composite index was up 1.9 percent at midday after sliding 1.8 percent on Wednesday. The blue-chip CSI300 index rose 2.1 percent following a 1.7 percent drop the day before.

Shares in Hong Kong were 0.6 percent higher.

"The dominating selling pressure is exhausting now, and we believe the stock market is bottoming out thanks to historically low valuations and 'a warm breeze' from policymakers," including cuts to banks reserve requirements, said Zhang Quan, an analyst with Huaan Securities.

However, the rally was mostly technical in nature after a heavy selloff, while sentiment remains depressed, Zhang added.

China's yuan weakened after the People's Bank of China (PBOC) set its official daily fixing at 6.6726 per dollar, its weakest level since Aug. 18, 2017.

It was the biggest one-day percentage weakening of the midpoint rate since Jan. 9, 2017.

The onshore yuan opened at 6.7 per dollar and was changing hands at 6.6984 as of 0331 GMT. It had earlier breached the key 6.7 to the dollar level to touch 6.7051.

The weaker fixing was nevertheless stronger than market expectations following the yuan's drop on Wednesday, which was triggered by new threats of U.S. tariffs on $200 billion of Chinese imports.

Qi Gao, Asia FX strategist at Scotiabank in Singapore, said the fixing was about 100 pips stronger than the market had expected, suggesting that the PBOC may have incorporated its "counter-cyclical factor" in its midpoint calculation.

"It shows the central bank intends to stabilise the market and calm investors," said Gao, adding that "one-way speculation on the yuan's depreciation is not in Chinese authorities' interests."

Introduced in May 2017, the counter-cylical factor was designed to curb speculation and volatility in the yuan.

(Reporting by Andrew Galbraith and Luoyan Liu; Editing by Sam Holmes)