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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 sought on Thursday to allay fears it would engineer a continued fall in the yuan in a move that brought calm to global markets rocked this week by a shock series of devaluations.
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. The People’s Bank of China said the yuan was close to market levels following three successive 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. There is “no basis for persistent and substantial devaluation”, said a deputy central bank governor, Zhang Xiaohui, at a hastily convened 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. Zhang said the yuan, also known as the renminbi, was close to “market levels” after three days of declines that knocked more than 3% 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. “The central bank has the ability to keep the renminbi basically stable at a reasonable and balanced level,” she said.
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, having taken markets by surprise on Tuesday with the yuan’s biggest one-day devaluation in 20 years. The central bank put the yuan’s central rate - from which it can deviate 2% in a single day - at 6.4010 yuan for $1, a drop of 1.11% from the previous day’s 6.3306.
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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. Beijing said Tuesday’s move was aimed at allowing the yuan to float more freely in line with market rates. It fell again on Wednesday and during most of Thursday to 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. Shockwaves from the devaluation had spread through financial markets, sending stocks and Asian currencies tumbling. But shares across Asia rose on Thursday after the Chinese central bank’s assurances. Japan’s Nikkei shrugged off early losses and downbeat capital expenditure figures to end 1% higher at 20,595.55.
European markets gained almost 2% before falling back when strong US retail sales indicated that interest rates would probably rise in the autumn, attracting money away from equity markets to interest bearing deposit accounts and bonds. The FTSE 100 gained almost 50 points in early trading before finishing the day at 6568, down 2.8 points.
“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.”“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. “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.
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, though some 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. Yet after a decade of little or no movement, the change rattled financial markets and threatened to fan political tensions with Europe and the US.
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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 was expected to prompt 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. Nicholas Teo, of CMC Markets warned the move could trigger a new currency war if central banks responded by trying to depress their country’s own exchange rates.
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 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 rate slowed to 7% last year, according to official figures that many analysts believe underplay the country’s recent economic downturn. Some analysts believe growth in 2014 was little more than half the official rate and this year will be no better after a fall in world trade.
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. A 4% drop in the yuan is unlikely to affect its decision, but a 10% dive would probably take a rate rise off the table.