Bloomberg News reported Wednesday the central bank had intervened in the market to buy dollars and prop up the yuan, which PBoC Deputy Governor Yi Gang declined to confirm at Thursday’s briefing. The midpoint is a guiding rate, from which trade can rise or fall 2% during the day.
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The country’s Central Bank raised the value of the yuan by 0.005pc against the dollar. Germany’s DAX gained 1.4 percent to 11,078.39 and Britain’s FTSE 100 added 0.8 percent to 6,620.92.
However, weak economic data and Tuesday’s policy change could lead to market forces pulling the yuan even lower in the coming days.
Another reason cited by some is a fall in China’s currency reserves, which have slumped $315 billion in the year to July to $3.65 trillion, as the central bank kept the exchange rate stable.
The euro got a lift this week as investors unwound euro-funded carry trades in the yuan and other emerging market currencies, which were hit hard by the devaluation.
A somewhat more neutral interpretation of China’s move includes the belief that China is attempting to delink from the dollar, as the anticipated end of quantitative easing in the U.S. has meant a stronger dollar and consequently a stronger RMB.
Global markets may have convulsed since China pushed its currency lower this week, but the step is “completely meaningless”, given its relatively small move, perma-bear Marc Faber, publisher of The Gloom, Boom & Doom Report, said.
The yuan is still only allowed to fluctuate up or down two per cent on either side of the reference rate.
“The central bank, if necessary, is fully capable of stabilising the exchange rate through direct intervention in the foreign exchange market to avoid (the) herd mentality resulting in irrational movements of the rate”, Massachusetts was quoted as saying by the official Xinhua news agency.
While a weaker currency is likely to help China’s exporters, the cuts have put financial markets on edge and sparked fears of a currency war of sorts as other countries – especially those that compete against China in global markets – feel pressurized to devalue their currencies. Before the dramatic declines suffered this week, the yuan, also called the renminbi, had appreciated 14% since mid-2014, according to Daiwa Capital Markets.
“The argument that China is trying to spur growth by weakening its currency to spur exports does not strike us as very convincing”, said Paul Gruenwald, S&P’s chief economist for Asia-Pacific.
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After devaluing the yuan for a third day, the People’s Bank of China (PBOC) called an extremely rare and urgent press conference.
