Investors have bet on a weaker won because it would help South Korea stay competitive against China in the global exports market as the yuan weakens. By devaluing the yuan, the Chinese government was catching up to the market, not trying to counteract it.
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Wednesday’s poor industrial production data also increased pressure for even more depreciation, National Australia Bank economists warned in a report. However, by Thursday, the yuan found a new equilibrium as the PBOC intervened via agent banks and signaled that the currency had fallen enough at a rare press briefing, according to Bloomberg. But on Tuesday it moved the fix by 1.9% and said in future that it would base the fix on the previous day’s market rate rather than its own judgement.
Some analysts said China’s currency moves could result in the Federal Reserve pushing back the date of its first interest rate rise, which many had expected next month.
The Chinese currency fell for a third day but by late afternoon its decline was only 0.2 percent compared with drops of up to 1.9 percent on the previous days.
China’s central bank said on Thursday that its currency would remain strong in the long run, despite worries over the yuan’s devaluation.
The country’s central bank has pushed the value of the currency lower for three consecutive days.
Additionally, in contrast to the yuan’s relative strength, Brazil’s real has shed around 60 percent against the U.S. dollar since 2011, while Turkey’s lira has lost 50 percent and all other Asian currencies, with the exception of the Hong Kong dollar, have all been weak over the past year, he noted.
“The central bank has the ability to keep the renminbi basically stable at a reasonable and balanced level”, she said.
“The rates from some foreign institutions are very important, some big commercial banks in the foreign exchange market are our market makers”.
The sharp falls came after the PBOC adjusted the exchange rate formation mechanism on Tuesday, a move it said was designed to better reflect market development in the exchange rate of the yuan against the US dollar. Recent economic data show a decline in Chinese exports, raising questions about whether the world’s second-largest economy was headed for a prolonged slowdown. Already, the International Monetary Fund is forecasting 6.8 per cent economic growth in China this year, the slowest rate since 1990.
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A research note from HSBC also said the new forex policy is part of China’s strategy to liberalize the yuan rather than a tool to support growth.
