But in a surprise announcement on Tuesday, the central bank cut its daily reference rate by 1.9%, triggering the yuan’s biggest drop in over two decades. The currency has held steady at that level.
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In this Tuesday, August 11, 2015 photo, a bank clerk counts Chinese currency notes at a bank outlet in Huaibei in central China’s Anhui province.
However, Massachusetts Jun, a PBOC economist, told China’s state-run Xinhua news agency Thursday that the central bank is still “fully capable” of stabilizing the exchange rate through direct intervention in order to “avoid herd mentality resulting in irrational movements of the rate”.
The PBOC also said on Thursday that it would monitor “abnormal” cross-border flows after the devaluation raised fears that investors would seek to pull capital out of China in anticipation of further falls in the currency.
The yuan opened slightly weaker but the gap between the guidance rate and the traded rate closed sharply as the central bank moved to stem a sharp sell-off that saw the currency lose about 4% in just two days.
The currency fell for a third day in a row but the decline of 0.5% overnight was smaller than drops of 2% in previous sessions this week.
Lawmakers have expressed alarm at a series of provocations, including the alleged hacking by the Chinese of U.S. government workers’ personnel records and maritime skirmishes between China and its neighbors in the South China Sea. “I see this going a lot further”, said Albert Edwards, a global strategist at Soc Gen in London who’s been calling for a yuan devaluation for at least 18 months.
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The move serves the country’s long-term ambition to build a more flexible and market-based exchange rate formation system that is, as the International Monetary Fund said on Wednesday, “important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets“. Doing so would improve China’s chances of having the yuan – formally known as the renminbi – become a standard currency for worldwide transactions. Beijing’s devaluation will makes China’s export goods cheaper, and its rivals may now have to follow suit. A lower yuan will make China’s exports more competitive. Prices reached a five-year low last month on expectations that the Federal Reserve will raise interest rates this year and as the greenback strengthened. In a press conference, the PBoC was “downplaying the need for a weaker yuan”, Barclays said.
