The Chinese exchange rate for the yuan fell over 1% overnight even as Peoples’ Bank of China (PBOC) officials tried to stem the decline with verbal and monetary support.
The central bank, which had described the devaluation as a one-off step to make the yuan more responsive to market forces, sought to reassure financial markets on Wednesday that it was not embarking on a steady depreciation.
Kit Juckes, of Societe Generale, said that he expected the Chinese economy to continue slowing, such that, “albeit at a more measured pace and with less fanfare than this week, we’ll see more yuan weakness in the weeks and months ahead”.
The improved mechanism takes into consideration the closing rate of the interbank forex market on the previous day, as well as supply and demand in the market, and price movement of major currencies.
The yuan is still only allowed to fluctuate up or down two per cent on either side of the reference rate.
Analysts said the PBOC’s steadying of the yuan had calmed the markets.
The dollar ticked up slightly on Friday after China’s central bank appeared to have stopped guiding the yuan lower for now, easing concerns that a weaker Chinese currency could derail plans by the US Federal Reserve to raise interest rates. “The central bank has the power to maintain the stability of the renminbi and to ensure that it remains at a reasonable and balanced level”, Zhang Xiaohui, assistant governor of the PBoC. told the press. A continued depreciation could have exacerbated these movements.
The Chinese central bank’s “opaque communications policy may well have led to panic over-selling earlier in the week”, Angus Nicholson of IG markets said in a commentary. The currency fared worse in offshore trade, touching 6.57.
The PBOC said that the recent decline of the yuan has released “accumulated” depreciation pressure of around 3 percent.
The central bank on Thursday set the yuan’s daily reference point just over 1 percent lower from the previous day, at about 6.40 per dollar.
Yi added the value of Yuan is determined by the market. “The sudden move on the part of China to devalue its currency yuan will have an adverse impact on India’s exports of textiles and clothing, which are facing already sluggish growth due to recessionary conditions in global markets”, Texprocil chairman R K Dalmia said in a statement here. It fell again on Wednesday, sparking market fears that Beijing was intent on a much deeper devaluation which could destabilise the global economy.