China weakened its currency for the third consecutive day yesterday, but financial markets that had been shaken by the surprise devaluation took heart as authorities pledged not to let the yuan plummet.
The central bank trimmed the reference rate for the yuan — also known as the renminbi (RMB) — by 1.11 percent to 6.4010 yuan for $US1, the China Foreign Exchange Trade System said, from Wednesday’s 6.3306.
The cut was less than the previous two days and came after reports the People’s Bank of China (PBOC) intervened on Wednesday to stem the yuan’s fall.
China adopted a more market-oriented method of calculating the currency rate this week in a move widely seen as a devaluation, raising fresh questions about the health of the world’s second-largest economy.
After global stock and currency markets staggered in response, the PBOC went on the offensive yesterday, telling reporters that the yuan was still a strong currency and that Beijing would keep the unit stable.
“Currently, there is no basis for the renminbi exchange rate to continue to depreciate,” PBOC Assistant Governor Zhang Xiaohui (張曉慧) told a briefing.
“The central bank has the ability to keep the renminbi basically stable at a reasonable and balanced level,” she said.
The comments drove a relief rally yesterday in Asian shares and Asia-Pacific currencies, which suffered their biggest two-day selloff since 1998 this week, although analysts said sentiment remained fragile.
“It’s likely the worst is over,” Canadian Imperial Bank of Commerce strategist Patrick Bennett said.
“PBOC intervention has calmed the market. There is not a sense that the onshore yuan will weaken forever,” he said.
The yuan was quoted at 6.4067 to the US dollar at midday, down from the previous day’s close of 6.3870.
China keeps a tight grip on the unit, allowing it to fluctuate up or down just two percent on either side of the reference rate, which it sets daily.
The PBOC on Tuesday announced a “one-time correction” of nearly two percent in the yuan’s value against the greenback as it changed the mechanism.
Previously, it based the fixing on a poll of market-makers, but declared it would now also take into account the previous day’s close, foreign exchange supply and demand and the rates of major currencies.
It has since lowered the central rate twice more and the week’s combined drop is the biggest since China set up its modern foreign exchange system in 1994, when it devalued the yuan by 33 percent at a stroke.
Analysts viewed the move as a way for China to both boost exports by making its goods cheaper abroad and push economic reforms as it seeks to become one of the reserve currencies in the IMF’s special drawing rights (SDR) group.
The volatility in the normally stable unit has raised concerns and many analysts predict the yuan is likely to continue to depreciate in the coming months, impacting global trade flows.
Speaking a day earlier, PBOC economist Ma Jun (馬駿) dismissed the possibility that China was seeking to wage a currency war, saying there was no need as exports were expected to pick up in the second half of the year.
“China does not have the need to start a currency war to gain an advantage,” he was quoted as saying by the official Xinhua news agency.
Credit rating agency Standard & Poor’s on Wednesday praised China’s devaluation of its currency and said the move did not threaten a currency war.
“China’s surprise move to allow for more exchange rate flexibility makes good economic sense and is not the start of a currency war or an attempt to jump-start growth,” S&P said.
However, the rating agency rejected arguments that the devaluation was motivated by a desire to boost Chinese exports.
“The argument that China is trying to spur growth by weakening its currency to spur exports does not strike us as very convincing,” S&P’s chief economist for Asia-Pacific Paul Gruenwald said.
“Exports are more a function of foreign demand, with the exchange rate playing a secondary role. There is no reason for that relationship to have changed,” he said.
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