“Given the sufficient forex reserves with the RBI, the central bank will not allow the continuous slide in rupee’s value”.
The Chinese currency is called the “renminbi”, and each unit is called a “yuan” – however the term yuan can also be used to refer to the currency generally.
China’s decision to move from a pegged exchange mechanism to a managed-float system has partly been driven by the strengthening US dollar, the currency to which it has historically been pegged.
“Trust the market, respect the market, fear the market, and follow the market”, the deputy governor of China’s central bank said at a rare press briefing yesterday as the world tried to figure out how far China is prepared to let its currency devalue.
As the Economist alighted, whatever the reason, a weaker currency won’t solve everything: the Yuan’s weakness won’t fix that overnight.
Analysts say Beijing will need to take more decisive measures to keep funds ample and borrowing costs low, such as cutting banks’ reserve requirements, allowing them to lend a greater share of deposits.
It is the largest single-day cash injection in the form of reverse repurchase agreement (repo) since January 2014, with the PBOC looking to reassure the market amid tightening liquidity.
Offshore one-year non-deliverable forwards contracts (NDFs)(CNY1YNDFOR=), considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 6.6045 per dollar, below last’s week high of 6.68.
If this is true, PBoC was defending a very costly de-facto peg around 6.2 for several months had little choice but to devalue and release some of the pressure on Yuan.
Reuters reported in July that the central bank was adding $48 billion into China Development Bank – a big financier of major infrastructure projects – via a debt-to-equity swap. Net outflow in foreign currencies amounted to 912.9 billion yuan in the year to July, according to the State Administration of Foreign Exchange.
China’s surprise devaluation of its currency this week triggered fears about waning competitiveness of Asia’s exporters and cast fresh doubt on the health of the Chinese economy.
“I don’t think the yuan’s depreciation is over”.
The People’s Bank of China intervened in the interbank market for a second time this week on Wednesday, pumping in 110 billion yuan through open market operations to steady interbank rates that have been shooting up as investors pull out of the yuan.
Combined exports and imports for the first seven months of 2015 fell 7.2 per cent from the same period last year, compared with Beijing’s full-year target of 6 per cent growth.
The higher funding costs in the money market have also led to a spike on Chinese government bond yields, especially the short-dated ones that are typically more sensitive to policy outlook.
It is no different to what China did, so why did the devaluation of the yuan reverberate around the globe in the way it did?