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China devalues yuan for third straight day, adding to fears of currency war China devalues yuan for third straight day, adding to fears of currency war
(34 minutes later)
China has moved the trading range for its currency significantly lower for the third day in a row, devaluing the yuan by 1.1% following cuts of 1.6% and 1.85% on Tuesday and Wednesday. China cut the reference rate for its currency for the third straight day on Thursday, after the surprise devaluation of the yuan this week unsettled global financial markets.
Related: China stuns financial markets by devaluing yuan for second day runningRelated: China stuns financial markets by devaluing yuan for second day running
The gap between the guidance rate and the traded rate closed sharply as the central bank tried to slow a sharp sell-off that saw the currency lose around 4% in just two days. The central bank put the yuan’s central parity rate at 6.4010 yuan for US$1, the China Foreign Exchange Trade System said, a drop of 1.11% from the previous day’s 6.3306.
The People’s Bank of China on Thursday set the midpoint rate at 6.4010 per US dollar prior to market open, weaker than the previous fix of 6.3306. It was also lower than Wednesday’s close and comes after China adopted a more market-oriented method of calculating the currency rate in a move widely seen as a devaluation.
The spot market opened at 6.3880 per dollar and was changing hands at 6.4288 at midday, 418 points weaker than the previous day’s close. The cuts have put financial markets on edge, sparking worries of a “currency war” as other countries feel pressure to devalue and raising questions about the health of the world’s second-largest economy, where growth is already slowing.
China’s decision to devalue the currency on Tuesday sparked fears of a global currency war and accusations that Beijing was unfairly supporting its exporters, but the central bank on Wednesday sought to reassure jittery global financial markets that it was not embarking on a steady depreciation. European stock markets in London, Frankfurt and Paris closed lower on Wednesday on worries China’s economy is struggling more than previously thought. But US stocks overcame early weakness and finished mostly higher.
However, sources involved in the Chinese policymaking process said powerful voices within government were pushing for the yuan to go still lower, suggesting pressure for an overall devaluation of almost 10%. Asian markets were mixed on Thursday but China’s benchmark Shanghai index was up 0.74% by mid-morning.
China keeps a tight grip on the yuan, allowing it to fluctuate up or down just 2% on either side of the reference rate, which it sets daily.
The People’s Bank of China (PBoC) on Tuesday announced a “one-time correction” of nearly 2% in the yuan’s value against the greenback as it changed the mechanism.
Previously it had said it based the fixing on a poll of market-makers, but declared it would now also take into account the previous day’s close, foreign exchange supply and demand and the rates of major currencies.
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% at a stroke.
Analysts viewed the move as a way for China to both boost exports by making its goods cheaper abroad and push economic reforms as it seeks to become one of the reserve currencies in the International Monetary Fund’s SDR (special drawing rights) group.
But the volatility in the normally unusually stable unit has raised concerns, and Bloomberg News reported on Wednesday that the central bank had intervened in the market to prop it up.
PBoC economist Ma Jun said on Wednesday that China could stabilise the yuan through direct market intervention.
“The central bank, if necessary, is fully capable of stabilising the exchange rate through direct intervention in the foreign exchange market to avoid [the] herd mentality resulting in irrational movements of the rate,” Ma was quoted as saying by the official Xinhua news agency.
He also dismissed the possibility that China was seeking to wage a currency war, saying there was no need as exports were expected to pick up in the second half of the year. “China does not have the need to start a currency war to gain advantage,” he said.
Agence France-Presse and Reuters contributed to this report