It also compounded jitters over China’s financial health after a debt-fuelled stock market bubble burst in June, following a 150 percent surge in the previous 12 months.
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The cuts have put financial markets on edge, sparking worries of a “currency war” as other countries feel pressure to devalue and raising questions about the health of the world’s second-largest economy, where growth is already slowing.
The dollar’s strength together with loss Japanese monetary policy has meant that since mid-2012 the yuan is 60% stronger than the Japanese yen, the currency of a country which which it competes fiercely for exports. But shares in Asia rose after the Chinese central bank’s assurances.
In Hong Kong, the Hang Seng Index climbed 0.4 percent, to 24,018.80 while the China Enterprises Index was up 0.4 percent, to 11,080.92 points. The Fed has said improving economic data will be key to determining when it raises rates for the first time in nearly a decade, widely expected between September and December. The next GDP print let’s say misses and the market really tries to push the yuan lower.
On Friday, the People’s Bank of China (PBoC) fixed the value of the renminbi higher against the dollar by 0.05 percent, after having devalued the currency by a total of about 5 percent over the past three days.
“We may still see net foreign exchange selling in August as the yuan is depreciating and the central bank has clearly stepped in the market”, said Lin Hu, an economist at Guosen Securities in Beijing.
“The central bank is capable of keeping the exchange rate basically stable at an adaptive and equilibrium level”, said Zhang Xiaohui, PBOC assistant governor.
The sharp falls came after the PBOC adjusted the exchange rate formation mechanism on Tuesday, a move created to better reflect market development in the exchange rate of the yuan against the U.S. dollar.
Beijing said the move was the result of switching to a more market-oriented method of calculating the daily reference rate which sets the value of the yuan, also known as the renminbi (RMB).
Ding called the reform “a one-off move” to eliminate price distortions following the central bank’s intervention, and said it was unlikely policymakers would return to the former management system in future.
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The spot rate is now allowed to trade within a range 2 per cent above or below the official fixing on any given day.
