Letting the market steer the yuan is the kind of move that should please critics who accuse China of controlling its currency to help exporters at the cost of other nations.
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There is strong chatter that Chinese officials are pushing the PBOC to let the yuan slide another 5-7% against the greenback although bank officials denied that today.
On a larger scale, however, more flexibility could end the yuan’s status as a stable anchor among currencies of developing countries, said Rajiv Biswas, chief Asia economist for IHS.
“Looking at the worldwide and domestic economic situation, now there is no basis for a sustained depreciation trend for the yuan“, the People’s Bank of China said in a statement.
After hitting a roughly one-month low Wednesday, the U.S. dollar rose against a basket of major currencies as the yuan’s decline slowed, easing worries that China’s decision to devalue its currency was a deliberate attempt to gain a competitive advantage.
“After a short run-in period, the market status will return to normal”, he said.
China sought to allay fears that the renminbi could enter into free-fall, as it devalued the currency for the third consecutive day.
“The Chinese yuan has appreciated by 80 percent over the past two years against the yen“.
The spot market opened at 6.3880 and was changing hands at 6.4080 after the PBOC comments, 210 pips weaker than the previous day’s close and only 0.1 percent away from the guidance point, the closest it has traded to the guidance rate since November 2014. Australia’s S&P/ASX 200 was down 0.6 percent to 5,358.40.
The central bank said that starting Tuesday, the daily target will be based on the yuan’s closing the previous day and information from traders about currency supply and demand. The bank can not intervene with this, but focuses more on improving the exchange rate formation mechanism.
The yuan stabilised as China’s central bank strengthened its currency’s reference rate for the first time since Tuesday’s devaluation.
“We have our own timetable to push forward the country’s capital market reform, and that can not be easily changed by exchange rate fluctuations”.
Interestingly, the global Monetary Fund greeted the devaluation as a welcome step.
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“The central bank has already withdrawn from regular interventions but other tools may be used to stabilize the market, such as verbal support and selling or buying currencies”.
