Chinese Yuan Stabilizes But Markets Potentially Volatile Amid Explosion in Tianjin

The daily reference rate was set at 6.3975 yuan to $1.0, from 6.4010 the previous day, the China Foreign Exchange Trade System said.

The decision to devalue China’s currency, also known as the renminbi, by pushing its official guidance rate down two percent triggered fears of a “currency war” and sent shockwaves through global financial markets.

It also drew accusations from U.S. politicians that Beijing was unfairly supporting its exporters.

Bloomberg News reported Wednesday the central bank had intervened in the market to buy dollars and prop up the yuan, which PBoC Deputy Governor Yi Gang declined to confirm at Thursday’s briefing.

But the People’s Bank of China took the unusual step of attempting to put a floor under the currency’s decline at a press conference. But trading in most Asian countries was up just after opening Thursday.

ANALYST VIEW: The Chinese central bank’s “opaque communications policy may well have led to panic over-selling earlier in the week”, Angus Nicholson of IG markets said in a commentary.

The People’s Bank of China (PBoC) on Tuesday announced a “one-time correction” of almost two percent in the yuan’s value against the greenback as it changed the mechanism.

“Inside the country, (the imbalance) has to do with an unexpected rise in July’s loan data published recently”, she said, referring to the unusual 1.61-trillion-yuan increase in new bank loans from the same month past year. It now sets the yuan’s daily fixing to the U.S. dollar based on the currency’s closing level the previous day.

The onshore spot rate was little changed at 6.3970 per dollar as of 9:35 a.m.in Shanghai, and has fallen 2.9 percent this week.

The Chinese central bank has effectively been keeping the yuan pegged to the dollar, setting a fixed rate every day and allowing it to trade within 2% on either side of that rate.

[The world has a bigger problem than China’s currency devaluation].

“We are seeing a much calmer market today… now it’s understood that it’s actually not an intentional steering of the yuan exchange rate, but rather… a more market-driven move”, said Commerzbank currency strategist Esther Reichelt in Frankfurt.

Although the central bank tried to pacify market concerns by stressing that the depreciation was a one-off adjustment, financial managers of China’s wealthy are unlikely to rely on the government’s ability to stabilize the yuan.

More indicators due on Wednesday for factory output, retail sales and fixed-asset investment are expected to underline sluggish growth in the world’s second-largest economy.

China’s surprise yuan devaluation on Tuesday had stirred worries about the health of the Chinese economy and fanned fears of currency wars. Investors have bet on a weaker won because it would help South Korea stay competitive against China in the global exports market as the yuan weakens.