But officials also said the yuan’s underpinning remains firm and that its value should strengthen, and dismissed the idea that the move was made to help the country’s sputtering exports sector. Authorities can point to demands by the worldwide Monetary Fund (IMF) to give market forces a greater role in determining the currency’s value.
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China accounts for 6% to 7% of eurozone exports, they said, suggesting that even a 10% fall in the yuan versus the euro “would have a limited impact on the eurozone” and would cut eurozone growth and inflation by about 0.1 percentage point over a 12- to 18-month period.
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.
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.
ANALYST VIEW: The Chinese central bank’s “opaque communications policy may well have led to panic over-selling earlier in the week”, Angus Nicholson of IG markets said in a commentary.
As emerging market currencies slide, exporting “waves of deflation to the West”, said Albert Edwards of Societe Generale, they will overwhelm lacklustre developed world profitability, taking us back to “outright recession”.
The currency has lost 3.5 per cent against the US dollar in China and around 4.8 per cent in global markets between Tuesday and Wednesday after the People’s Bank of China changed the way it calculates the reference rate around which the yuan is allowed to trade in a 2-percentage-point band.
Zhang said the former fixing rate was about 3 percent off domestic and global market expectations, and the deviation had been basically fixed so far. In China, Hong Kong’s Hang Seng climbed 0.4 percent, while the Shanghai Composite Index on the mainland added 1.8 percent. “The central bank is capable of keeping the renminbi stable”.
The currency’s fall comes after the PBOC adjusted the exchange rate formation mechanism on Tuesday, a move designed to better reflect market development in the exchange rate of the yuan against the U.S. dollar.
The New Zealand and Australian dollars fell to six-year lows against the US currency.
The move by the People’s Bank of China serves to highlight the increasing level of concern awarded to the world’s second-largest economy.
The West is crying foul and accusing Beijing of waging a currency war through direct intervention in the market.
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It also drew accusations from U.S. politicians that Beijing was unfairly supporting its exporters.
