Chinese Yuan Stabilizes But Markets Potentially Volatile Amid Explosion in Tianjin

The daily reference rate was set at 6.3975 yuan to $1.0, up from 6.4010 the day before, the China Foreign Exchange Trade System said.


The volatility in the normally stable unit has raised concerns, and many analysts predict the yuan will continue to depreciate in the coming months, impacting global trade flows. But after a decade of little or no movement, the change rattled financial markets who feared China might be prepared to engage in a currency war with the US and Europe.

Recent economic data had seen a decline in Chinese exports, adding to the worries that the world’s second largest economy was headed for a prolonged slowdown.

Having tumbled some three percent against the greenback since Tuesday in an unprecedented fall, the yuan continued to weaken slightly on Thursday but China’s central bank said there was no basis for further depreciation. “China risk” has dampened hopes for a September rate hike and upcoming data could further chip away at expectations for a Fed tightening”, said Junichi Ishikawa, market analyst at IG Securities in Tokyo. They say Beijing has indicated it is taking steps toward market-determined exchange rate – something that even China’s biggest critics in Washington have been demanding for years. Last year, the two countries recorded an export similarity index of 0.346 in the U.S. import market.

Rumours that Beijing was seeking a 10 per cent devaluation of the yuan were described as “sheer nonsense” and “totally unfounded” by deputy governor Yi Gang.

Furthermore, the Chinese leadership is still reeling from the fallout of the stock-market crash.

However, Massachusetts Jun, a PBOC economist, told China’s state-run Xinhua news agency Thursday that the central bank is still “fully capable” of stabilizing the exchange rate through direct intervention in order to “avoid herd mentality resulting in irrational movements of the rate”.

Investor fears of a currency war or substantial asset depreciation eased, but US equities were hit by weak energy prices, dragging shares of those companies lower.

Luxury goods stocks like the French giant LVMH and Coach, were lower, along with automakers like German carmaker BMW which lost 2.6 percent and General Motors which lost 2.4 percent.

“Nevertheless, a more market-determined exchange rate would facilitate SDR operations in case the Renminbi were included in the currency basket going forward”.


The central bank also intervened in the market directly on Thursday, using dollar reserves to support the currency.

US stocks wobble, then recover after China currency weakens