China central bank says no basis for further yuan depreciation, will monitor

HONG KONG (AP) – World stock markets rebounded Thursday as the fall in the Chinese yuan slowed and the country’s central bank tried to dampen speculation of further devaluation.

“After a two-day adjustment, the [yuan] has gradually returned to a more market-oriented level”, PBOC official Zhang Xiaohui said during a rare press conference.

A further motivation for China reducing the value of its currency against the dollar is the fact that its economy is slowing, partly because of the change in the structure of the Chinese economy to a more consumer and services-driven model, as I argued in my column in Monday’s Telegraph.

Asian shares staged a relief rally Thursday and regional currencies gained after China reassured markets it would not allow the yuan to plummet after a surprise devaluation this week.

“The impact on foreign exporters is only beginning”, said Evan Lucas, a financial market strategist for the Australian firm IG Markets, in a report. The other currencies are the dollar, the euro, the yen and the British pound.

China’s central bank is rushing to calm fears over the yuan’s plunge in recent days.

“This is sheer nonsense”. Governments and central banks have limited scope to influence the value of a currency when the market is moving against them as the UK discovered in the early 1990s when it was in the ERM. “A larger-scale weakening of the renminbi looks increasingly unlikely”.

A final factor contributing to the recent devaluation of the yuan is the long-term desire of China to promote its currency for wider use in global trade and investment. Otherwise, he said it risks capital flight, which could lead to a lower exchange rate. That meant the yuan rose as the dollar jumped over the past year, hurting its exporters and raising the threat of politically unsafe job losses. The central bank said it acted because the Chinese currency was rising while market forces said should fall.

Nevertheless, some traders forecast more pressure on the currency in the weeks and months ahead. They have urged China for years to switch to a market-based system but assumed that would cause the yuan to rise and help their own exporters.

China’s territorial ambitions in the seas of East Asia and alleged cyber spying on a massive scale against U.S. government and businesses are likely to dominate the agenda when Chinese President Xi Jinping makes his first state visit to the United States in September. This is the value of the yuan against a basket of currencies of China’s trading partners and adjusted for inflation.

“But the administration has no economic basis for criticizing China’s move”, said Prasad.

A customer holds a 100 Yuan note at a market in Beijing, August 12, 2015.

At the same time, the bank was simultaneously signalling that it did not want to see a further sharp decline in the yuan. On Wednesday, for instance, China reported that auto sales sank 6.6 percent in July.

“Right now we are not optimistic”, the manager, Meng Zhuo, was quoted as saying.

The depreciation “will not change the gloomy picture of global demand”, said Vincent Chan of Credit Suisse in a report.

Manufacturers of computer disk drives have shifted some operations from Thailand to China and that outflow could accelerate if a weaker yuan reduces Chinese operating costs, according to Sathirathai and Wan. And the euro is still 13pc more competitive against the yuan than it was last summer.