China’s currency has continued to slip this week, keeping global investors on edge.
In the end, however, it went further, fixing the rate at 6.3306 to the US dollar – slightly weaker than the previous day’s close. “The growth is much stronger than some other economic entities that faces a higher pressure on devaluation”.
The won has also been among the most badly hurt of currencies in the region, on track to lose 1% this week.
“If the Chinese authorities choose to let market forces play a decisive role in determining the future value of the currency, this will be regarded as a very positive move”. It could dampen the confidence of investors in holding yuan, which could be a setback in China’s goal of the internationalization of the currency. In freely traded offshore markets the exchange rate is now nearly 2 percent weaker than on the mainland.
The devaluation of yuan against dollar can be justified by the strong trend of the latter. The composition of the basket is a secret, but it’s believed to be dominated by the U.S. dollar.
The dollar’s moves in U.S. trading were subdued, which meant the PBOC could set Friday’s reference below Thursday’s 6.4010, at around 6.39, said Sean Callow, senior currency strategist at Westpac. The Dow Jones industrial average gave up 41 points, or 0.2 percent, to 17,363, and the Nasdaq composite fell four points, less than 0.1 percent, to 5,040.
PBoC governor Yi Gang, who also runs the State Administration of Foreign Exchange, was asked at a news conference yesterday if the central bank had intervened behind closed doors to halt the currency’s slide on Wednesday. Chinese people, anxious about the economy and seeking investment opportunities overseas, have been pulling money out of the country.
The market entered negative territory in the morning on fears the prolonged yuan depreciation would destabilize the economy. US stocks were poised to open higher. U.S. crude oil was down 0.4 percent at $42.07 a barrel in early Asia trade, while Brent rose 0.06 percent to $49.25, after earlier falling to a low of $49.11, ahead of Friday’s expiry of its front-month contract.
Or so Beijing says.
Some Chinese steel producers have already reduced export prices in response to the lower yuan. And they need help: Exports dropped a steep 8.3 per cent in July year over year.
Part of the problem is that it’s still unclear to the outside world if China was in full control of the yuan’s devaluation or whether the collapse in value took it by surprise. Perhaps the Chinese economy is decelerating even faster than anyone realizes.