European stocks were on track for their worst week in six after exporting companies with exposure to China saw their stocks fall after the yuan was devalued. “With the devaluation of the yuan, they have to pay more for every dollar that they buy and chances are some importers will reduce their purchases of bananas”, he said. The dollar was last up 0.13 percent against the yen at 124.370 yen. The bank said there is no ground for persistent and substantial depreciation.
The officials said that reports suggesting the government could allow the yuan to fall 10% were “unfounded” and that there was no need to adjust the exchange rate to support exports. Yuan weakness would push down the price of Chinese steel, intensifying the supply glut in the global steel market, and driving down prices globally, Mirae Asset Securities said in a report.
Under a managed floating exchange rate system, the value of the yuan is determined by the market.
Chinese stocks turned negative in midday trading on Thursday, diverging from the rest of Asia, after the Chinese central bank reiterated that there was no basis for continued currency depreciation. Japan’s Nikkei 225 rose 1 percent to 20,595.55 and South Korea’s Kospi gained 0.4 percent to 1,983.46. And Thursday, it dropped the currency by another 1.11%.
On Friday, China’s central bank set the daily rate of the yuan against the U.S. dollar slightly higher than the previous day’s fix.
This week’s moves are expected to be a precursor to China widening the trading range of the currency for the the first time since March 2014. But that doesn’t mean there won’t be any impact at all. First, it is another step towards a more open and global Chinese economy.
While a limited yuan devaluation shouldn’t greatly change the eurozone’s inflation outlook, S&P said, the reaction in emerging markets is critical.
The yuan’s spot exchange rate also remained stable at around 6.4 against the U.S. dollar.
In the short term, the change will give a shot in the arm to Chinese exports, especially to Europe. She said budget handset makers may enter developed countries earlier than planned if the yuan continues falling.
Another short-term impact will be the fluster that is caused in US politics. Concern that is now deepened because the Chinese move puts further upward pressure on the dollar.
It also drew accusations from US politicians that Beijing was unfairly supporting its exporters.
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. “We are confident about steadily achieving our goals”. Xi Jinping’s forthcoming visit to Washington should be interesting. At the peak of Greece’s most recent debt crisis, China’s “hard landing” lingered as the biggest contagion risk for the US economy. The PBC announcement seems to be a message from China that it will not.
Compounding investors’ concerns about China is the complexity of discerning the health of the Chinese economy. But with his typical understatement, GOP presidential candidate Donald Trump said China is “making it absolutely impossible for the United States to compete”.