The country’s Central Bank raised the value of the yuan by 0.005pc against the dollar.
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Whatever the reasons, the People’s Bank of China yesterday assured the market that there was no basis for the depreciation to persist, and that it will step in when excessive volatility arises.
China’s currency devaluation bombshell this week blew apart the growing consensus that global inflation had bottomed out and was slowly moving higher, forcing investors to reconsider their assumptions on a wide range of financial markets. Lower prices are possible in industries such as clothing and basic toys where global competition is fierce and producers in countries such as China don’t have much power to pass on their higher costs to shoppers. “Weaker growth momentum in emerging markets, contributing to commodity-price weakness, coupled with the dollar’s strength, is also creating risk for European credits”. The currency was down 0.8 percent at midmorning but that narrowed to a 0.2 percent decline after the comments, compared to Wednesday’s closing price.
Still, the PBOC has shown no signs of backing down.
The central bank still seems willing to intervene directly. On Thursday, the bank called a news conference to underline the message. On a broader level, it gives Chinese companies a bigger opportunity to raise market share overseas, which poses a “long-term threat” to South Korean companies such as Samsung, said Song Eun-jeong, an analyst at Hi Investment & Securities. That process “won’t be easily derailed by small [market] fluctuations or external events”, he added.
The fixing rate dropped 1.1 percent yesterday, after sliding 1.9 percent on Tuesday and 1.6 percent on Wednesday.
A UBS research report said that the yuan could remain weak and suffer more losses over the next six months as China is eager to take advantage of a falling yuan to make China’s exports more competitive in the world market. Citigroup said the resilience of exports and their diminished role in driving growth suggest the benefits from a larger weakening of the currency would be limited for China, while threatening to accelerate capital outflows.
“The central bank is capable of keeping the exchange rate basically stable at an adaptive and equilibrium level”, said Zhang Xiaohui, PBOC assistant governor.
It was a natural decision after the yuan appreciated 10 percent against a basket of major currencies since 2014 and after China injected almost a trillion yuan to save a stock market slump in June, aggravating the yuan’s depreciation pressure, the central bank said. “In coming months, if the intervention eases, the data will return to normal”, the trader said.
However, many find ways to circumvent this, reflected in the fact mainland Chinese citizens are some of the biggest foreign buyers of property in markets like Australia, the United States and Canada. Then, earlier this year, they said they would open the Shenzhen equity market.
Despite the calming words, money managers say many of China’s wealthy are unlikely to let their cash ride on the ability of authorities to put a floor under the yuan.
“The impact from slower growth in China will likely be largely offset by robust demand from the US and the UK”, said Holger Schmieding at Berenberg bank.
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For more than a year, China’s slowing economy has created pressure on the renminbi to weaken. Foreign investors fled. The government stepped in with massive stimulus and stringent rules to stop the rout.
