Policy advisers are anxious the PBoC’s gradualist approach risks reinforcing expectations for more depreciation – a sort of self-fulfilling prophecy – and a thesis supported by a sharper fall in the offshore exchange rate, which is not regulated by the central bank, than in the onshore rate.
Advertisement
A gauge of major stock markets globally fell 1.9 percent and Nikkei futures were down 2.6 percent.
China’s central bank surprised some in the markets on Wednesday by setting a lower fix for the country’s currency against the USA dollar. While that’s 0.46 percent stronger than the previous day’s effective close of 4:30 p.m.in Shanghai, a gauge of dollar strength fell by about 0.4 percent between then and the fixing’s release.
Against the yen, the rand slid to as low as 6.7147 yen ZARJPY=R, and was last down 4.3 percent from late US trade on Friday at 6.8807 yen.
As fears about Chinese growth persist, Wall Street shares tumbled for a second day with the Standard & Poor’s 500 index .SPX losing over 2 percent. Analysts also expect other emerging economies to start competitive devaluation, or letting their currencies weaken to maintain competitiveness, something that has been flagged as a big worry by central bankers around the world, including RBI Governor Raghuram Rajan.
Only one analyst among 64 surveyed by Bloomberg expects the yuan to weaken beyond 7 per dollar this year. That would be the opposite of what would be expected in a “currency war” aimed at gaining an export advantage.
A sizable surplus in production capacity, slowing population growth and an aging population are eating away at China’s potential growth rate. “We are going to be clearly monitoring the global situation”. That rate had always been seen as a mechanism by which the central bank would control the currency against market pressure. “As much as there are economic reasons for a weaker exchange rate, I think the past few weak fixings have really caused a lot of uncertainty over whether they’re seeking to devalue the currency”. Nevertheless, in an attempt to calm down the markets, the PBOC’s China Foreign Trade System (CFETS) repeated today that there was no basis for the yuan’s continuous depreciation and that it was stable against a basket of currencies in 2015.
Meanwhile, the Shenzhen Component was down more than 8 percent when it closed.
Advertisement
From a macroeconomic perspective, a weaker exchange rate is also consistent with China’s monetary policy easing.
