The central bank put the yuan’s central parity rate at 6.4010 yuan for $US1, the China Foreign Exchange Trade System said, a drop of 1.11% from the previous day’s 6.3306.
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With such comments in mind, analyts were sceptical about the central bank’s Tuesday announcement that it would apply a new methodology to determine the standards it uses to fix rates, ones that are more responsive to domestic and global market conditions and foreign exchange demand and supply. The yuan also strengthened in spot market trading, changing hands at 6.3918 late in the Asian session.
On Tuesday, the PBOC cut the yuan’s reference rate against the U.S. dollar by nearly 1.9 percent, catching the global financial markets off guard and sparking a currency depreciation competition in the region.
Earlier on Wednesday, the PBoC warned it was not pursuing steady depreciation in response to allegations that Beijing was manipulating the currency to boost exports.
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But depending on whom you ask, China’s move to tolerate a weaker currency is either a revolutionary development for its financial markets, or one that was “really about avoiding hell”, as Natixis labelled it in a research note.
According to Dmitry Bedenkov, chief analyst at investment company Russ-Invest, the efforts of China to stimulate its economy will be favorable to the world economy in general.
But he added that the PBoC would implement “effective management” of the exchange rate in case of external shocks or extreme currency volatility.
Economic growth in China has slowed to 7.4 per cent, after enjoying a break neck pace of above 10 per cent in recent years. The next GDP print let’s say misses and the market really tries to push the yuan lower.
However, the central bank’s move is probably not significant enough to make much difference to either exporters or buyers of Chinese exports.
“China does not have the need to start a currency war to gain advantage”, he was quoted as saying by the official Xinhua news agency.
Over on US shores, July Retail Sales came in this morning as expected with a rebound to 0.6% after another soft number in June.
“And, of course, not every one can have a weak currency”, he said.
The currency is then allowed to move 2% above or below this midpoint in daily trading.
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“China does not follow a free-floating currency regime and it is known that China’s central bank closely controls the value of the yuan“, said Arie Gozluklu, assistant professor of finance at the Warwick Business School. They had tried a stimulus package accompanied by lower interest rates, but as the results fell short of their goals, it opened the way for a devaluation of the yuan, which had been pegged to the US dollar.
