It has since lowered the central rate twice more, and the week’s combined drop is the biggest since China set up its modern foreign exchange system in 1994, when it devalued the yuan by 33 percent at a stroke.
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The cut, and two subsequent reductions, sent global financial markets into a tailspin as it raised questions over the health of the world’s second-largest economy and sparked fears of a possible currency war.
“The primary reason for weaker Asian currencies has been the one-off devaluation of the Chinese yuan and the subsequent depreciation”, said Jason Daw, head of Asia currency strategy at Societe Generale AG in Singapore.
The yuan fell for three consecutive days and had repeatedly touched fresh four-year lows since Tuesday, when the People’s Bank of China (PBOC) surprised the market by devaluing the yuan by almost 2 per cent.
Thursday’s central bank comments came after analysts said allowing market forces free rein could drive the yuan sharply lower.
The central bank also intervened in the market directly on Thursday, using dollar reserves to support the currency.
Copper advanced 1.1 percent to $5 246.50 a metric ton on the London Metal Exchange, while nickel, lead, zinc and tin added at least 0.4 percent.
The bank of China’s move is probably not significant enough to make much difference to either exporters or buyers of Chinese exports.
“From a long-term view, the renminbi remains a strong currency”, Zhang said, adding that “in the future, the renminbi will be back on the appreciation track”.
Sue Trinh, senior FX strategist at Royal Bank of Canada in Hong Kong, says “we are far from fairly valued” and sees the yuan dropping to 6.95 per dollar by the end of next year. But after a decade of little or no movement, the change rattled financial markets and threatened to fan political tensions with Europe and the United States.
PBoC’s Deputy Governor Yi also said there was “no basis for a persistent weakening in the yuan, that it was a strong currency in the longer term, and that the aim of the PBoC is to have the market determine the exchange rate”, according to Barclays.
Or, as one Chinese central bank official put it: “a fixed exchange rate looks stable but it hides accumulated problems”.
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“This is not a marginal event, given China’s economic weight”, they said. Southeast Asian economies have also been struggling with tepid growth and slowing exports amid the weak economic expansion in Europe and Japan. This solid data point for the US economy bolsters the case for a data-dependent FOMC to keep their minds on a September liftoff for interest rate normalization.
