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The Chinese yuan has reached new lows as the trade war threatens market instability

SHANGHAI (Reuters) – China's yuan dropped to a new low on Friday and was in the worst month since record when a fierce Sino-US trade series threatened to shake the world's second-largest economy, even as the recovery in equities brought a minimum Quiet.

FILE PHOTO: Chinese 100 yuan banknotes are being seen on a counter of a commercial bank branch in Beijing, China, March 30, 2016. REUTERS / Kim Kyung-Hoon / File photo

Chinese equities also fell to their biggest monthly decline since January 2016, highlighting investor concerns as Washington and Beijing showed no sign that they would withdraw from their tariff.

The benchmark index CSI300 rose 1.15 percent at 02:30 GMT, while the Shanghai Composite Index gained 0.8 percent despite down 8.8 percent and 9.1 percent for the month.

The yuan lost about 3.4 percent of its value against the dollar in June, the largest drop since the market price was unified in 1994. On Friday at 02:30 GMT, it traded at 6.6368 per dollar.

US President Donald Trump has shaken the world trade order by trying to renegotiate the terms of some of the US trade relations, particularly with China.

The United States targets $ 34 billion in Chinese tariffs, which are set to come into effect on July 6, and threatens tens of billions of dollars more for similar tariffs.

A China Yuan Note is seen in this illustration photo on May 31, 2017. REUTERS / Thomas White / Illustration

Investors fear a large sell-off of stocks, and the yuan could trigger capital outflows, adding to the burden on the economy and making policymaking more difficult as the authorities defend themselves against the US trade war.

Chinese 10-year treasury futures for delivery in September, the most-traded contract, jumped 0.24 percent.

"The central bank is expected to step up its efforts to calm investors and curb the devaluation of the yuan, which has led to risk aversion in regional markets, including a possible reintroduction of the anti-cyclical factor (CCF)," Gao Qi said , FX strategist at Scotiabank in Singapore, wrote in a note on Friday.

He said that there would be "strong resistance" at 6.70 yuan per dollar.

A trader at a regional bank in Shanghai who did not want to be nominated said the central fix set by the central bank each morning was "filtered" so as not to let the yuan drop too much.

"It's too early to say if the anti-cyclical factor has been revived – if market sentiment could recover by itself, it's not necessary to use the factor – the market needs some time to digest," said the dealer.

In May 2017, People's Bank of China added a secret "counter-cyclical factor" to its formula for calculating the mean, which helped to place a bottom under a falling yuan. At the beginning of this year, the X-factor was effectively reduced as the yuan recovered.

The trader said dollar demand was strong this week and could last until July 6, when US tariffs on Chinese goods should come into force.

Reporting by John Ruwitch, Winni Zhou and Samuel Shen; Processing of Sri Navaratnam

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