China weakened its currency for the third consecutive day Thursday, but financial markets that had been shaken by the surprise devaluation took heart as authorities pledged not to let the yuan plummet.
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Asian stock markets stabilised this morning with some even strengthening after the surprise devaluation of China’s yuan was halted.
Who will benefit after the Chinese government devalued the yuan this week? The euro fell half a percent on Thursday, hitting a low of $1.1105 after minutes from the European Central Bank’s latest rate meeting showed policymakers anxious about the impact of Chinese market volatility and an upcoming US rate hike.
Following Tuesday’s “one-off depreciation”, which left the yuan nearly 2 percent weaker against the U.S. dollar, the PBOC has lowered the midpoint rate twice.
“The PBOC sees 6.39-6.40 a dollar as an equilibrium level”, Li Liuyang, a Shanghai-based strategist at Bank of Tokyo-Mitsubishi UFJ told Bloomberg.
The ChiNext Index, tracking China’s Nasdaq-style board of growth enterprises, added 2.4 percent to end at 2,684.26. The fear is that China’s economy is slowing more than expected and that U.S. companies that do business there would be hurt by a stronger dollar related to the yuan depreciation, which would dent sales of U.S. products in China. Beijing said the change was aimed at making the tightly controlled currency more market-oriented.
China’s central bank said it has the firepower to defend the yuan if necessary, and stressed the yuan would stabilize and eventually rise.
“We agree with the central bank that the one-off adjustment seems to be nearing completion”, HSBC said.
Tan said that China’s gross domestic product (GDP) accounted for 43 percent of the total created by the economies in the Asian Pacific region, so there is no doubt that other regional currencies will follow the yuan to move lower, while the magnitude of the falls in different currencies will vary.
A strong currency makes a country’s exports more expensive, which in turn reduces export volume therefore eroding any trade surplus.
The International Monetary Fund welcomed the decision saying: “The new mechanism for determining the central parity of the Renminbi [yuan] announced by the PBC [People’s Bank of China] appears a welcome step as it should allow market forces to have a greater role in determining the exchange rate”.
Japan’s Nikkei stock index fell 0.3 percent, and was down about 0.9 percent for the week.
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The economist said as the currency responded positively to the press conference, it should mean that the PBoC can lower the reference rate by a smaller margin on Friday.
