Yen surges to 4 1/2-month high as yuan slides further

A lower currency on the other hand will support the country’s export sector, which, thanks to rising land and labor costs, is not as competitive as it used to be.

“An appropriate size for China’s forex reserves should be around $1.5 trillion”. The yuan closed at 6.5929 per dollar, its weakest level since mid-February 2011.

The yen rose to its highest against the dollar in more than four months on Thursday as investors looked for a haven after China guided the yuan aggressively lower, fuelling fresh anxiety about its economy and its policy intentions.

The yuan can only move up or down against the United States dollar by two percent from a mid-rate set daily by the central People’s Bank of China (PBoC).

China sets an exchange price that its economists believe is defensible against outside speculation, and then the bank uses its considerable (but decreasing) foreign currency reserves to fix that price. For the onshore yuan, it can also enforce capital controls more strictly, which it has done, but goes against the promised reforms.

China’s reserves have already dropped over US$600 billion from the all-time peak of US$3.99 trillion in June 2014.

Whether market forces are moving the yuan lower or China’s central bank, the reaction remains the same from China’s competitors: devalue their money.

Taiwan’s central bank entered the market, as it has done nearly every session recently, to prop up the USA dollar and slow down the pace of the Taiwan dollar’s appreciation in an attempt to protect the country’s exports, they said. If the dollar continues to appreciate against other currencies, however, China does not want to continue to follow it. Hence the recent communications focusing on the trade-weighted index and the commitment to maintain a fairly stable exchange rate in that sense. “Their trading is irrelevant to real economic activity and doesn’t represent true market demand or supply – they are just causing abnormal swings in the yuan exchange rate and sending wrong signals to the market”, the statement said.

On an annual basis, China’s FX reserves fell 512.66 billion dollars in 2015.

Beijing has long pressed the International Monetary Fund to make the yuan part of the select club of currencies, along with the U.S. dollar, the euro, the yen and British pound sterling.

China’s falling yuan means US multinational corporations face more pressure on their profits, but the greenback likely won’t appreciate as dramatically as it did a year ago, analysts say. Turnover totaled US$619 million during the trading session. “The biggest risk in China is not really the economy”, said Qian Wang, senior Asia economist for Vanguard Investments Hong Kong.