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| China plays down devaluation fears as yuan cut for third straight day | China plays down devaluation fears as yuan cut for third straight day |
| (about 3 hours later) | |
| China’s central bank has dismissed concerns that the yuan has further to fall, bringing a sense of calm to global markets that were rocked earlier this week by the biggest devaluation in 20 years. | China’s central bank has dismissed concerns that the yuan has further to fall, bringing a sense of calm to global markets that were rocked earlier this week by the biggest devaluation in 20 years. |
| The People’s Bank of China said the yuan was close to market levels following declines that stoked fears of a “currency war” should the US and Japan respond by pushing down their exchange rates. | |
| There is “no basis for persistent and substantial devaluation”, said a deputy central bank governor, Zhang Xiaohui, at a news conference on Thursday. | |
| Zhang said the yuan was close to “market levels” after two days of declines that knocked more than 4% off its value. | |
| However, several analysts said Beijing was actively misleading investors as it sought to generate a boost in exports over the coming months with a near 10% fall against the dollar. | However, several analysts said Beijing was actively misleading investors as it sought to generate a boost in exports over the coming months with a near 10% fall against the dollar. |
| 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. The central bank put the yuan’s central parity rate at 6.4010 yuan for $1, a drop of 1.11% from the previous day’s 6.3306. | 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. The central bank put the yuan’s central parity rate at 6.4010 yuan for $1, a drop of 1.11% from the previous day’s 6.3306. |
| Related: China's currency devaluation could spark 'tidal wave of deflation' | Related: China's currency devaluation could spark 'tidal wave of deflation' |
| The yuan fell 1.9% on Tuesday after a surprise change in exchange rate policy that Beijing said was aimed at making the tightly controlled currency more market-oriented. It fell again on Wednesday and by the end of trading on Thursday had recovered slightly, though was still down at 6.3982 to the dollar from the previous day’s close of 6.3870. | |
| Shockwaves from the devaluation had spread through financial markets, causing stocks and Asian currencies to tumble. But shares across Asia rose after the Chinese central bank’s assurances. Japan’s Nikkei shrugged off early losses and downbeat capital expenditure figures to end up 1% at 20,595.55. European markets gained almost 2%, while the FTSE 100 was 0.7% ahead in lunchtime trading. | |
| “There is a degree of calm returning to the market,” Mitul Kotecha, head of Asia-Pacific FX strategy for Barclays in Singapore, told Reuters. “The market certainly perceives that the Chinese authorities don’t want the [yuan] to weaken too dramatically.” | |
| Thursday’s central bank comments came after analysts said allowing market forces free rein could drive the yuan sharply lower. | Thursday’s central bank comments came after analysts said allowing market forces free rein could drive the yuan sharply lower. |
| “It is very possible that we could see a 10% to 15% drop in the exchange rate against the US dollar in the next week or two,” said Duncan Innes-Ker, of The Economist Intelligence Unit, in a research note. | |
| Susan Joho, an economist at the bank Julius Baer, said she expected the yuan to depreciate, possibly as low as 6.8 to the dollar, “where the currency would reach an undervaluation similar to the euro’s” and then stabilise. | Susan Joho, an economist at the bank Julius Baer, said she expected the yuan to depreciate, possibly as low as 6.8 to the dollar, “where the currency would reach an undervaluation similar to the euro’s” and then stabilise. |
| Investors interpreted Beijing’s move as an effort to benefit its exporters although many economists rejected that view, arguing that weak global demand meant there was little benefit in driving the currency lower. | Investors interpreted Beijing’s move as an effort to benefit its exporters although many economists rejected that view, arguing that weak global demand meant there was little benefit in driving the currency lower. |
| The yuan’s decline was small compared with fluctuations of freely traded currencies. But after a decade of little or no movement, the change rattled financial markets and threatened to fan political tensions with Europe and the US. | The yuan’s decline was small compared with fluctuations of freely traded currencies. But after a decade of little or no movement, the change rattled financial markets and threatened to fan political tensions with Europe and the US. |
| Related: This isn’t China’s Lehman moment – yet | Linda Yueh | Related: This isn’t China’s Lehman moment – yet | Linda Yueh |
| While the International Monetary Fund welcomed Beijing’s support for market forces, the change prompted complaints in the US Congress that Beijing was manipulating its currency to gain a trade advantage. | While the International Monetary Fund welcomed Beijing’s support for market forces, the change prompted complaints in the US Congress that Beijing was manipulating its currency to gain a trade advantage. |
| “This move may also trigger a new currency war” if central banks respond by trying to depress their country’s own exchange rates, said Nicholas Teo, of CMC Markets, in a report. | |
| China was exporting “deflationary pressure”, said Morgan Stanley analysts Hans Redeker, Ian Stannard and Sheena Shah in a report. “This is not a marginal event, given China’s economic weight.” | |
| China’s economic growth has slowed to an annual rate of just 7%, which is healthy for most countries but far below the previous decade’s double-digit pace. | China’s economic growth has slowed to an annual rate of just 7%, which is healthy for most countries but far below the previous decade’s double-digit pace. |
| Beijing’s move could complicate the US Federal Reserve’s decision about when to raise interest rates that have been near zero since the 2008 global financial crisis. The Fed was expected to act later this year, possibly as early as next month. | Beijing’s move could complicate the US Federal Reserve’s decision about when to raise interest rates that have been near zero since the 2008 global financial crisis. The Fed was expected to act later this year, possibly as early as next month. |
| A weaker yuan would reduce the price of Chinese goods, pushing down already-low US inflation of 1.3%. The Fed wants to be “reasonably confident” inflation is returning to its 2% target before raising rates. | A weaker yuan would reduce the price of Chinese goods, pushing down already-low US inflation of 1.3%. The Fed wants to be “reasonably confident” inflation is returning to its 2% target before raising rates. |