Yuan fall fuels China-West currency war

The People’s Bank of China said the change was aimed at making the tightly controlled yuan more market-oriented. The new exchange rate policy also tallies with the long-standing pledge by China’s leaders to let supply and demand play a “decisive role” in the economy. It’s more than a geopolitical cliche to say that times have changed. “The market certainly perceives that the Chinese authorities don’t want the CNY to weaken too dramatically”. On Thursday, it slid another 0.5 per cent relative to the U.S. dollar, based on the midpoint set by the central bank.

Still, the PBOC has shown no signs of backing down.

The news conference was an unusual event for an organization that rarely puts a public face forward and typically communicates through lengthy messages on its website, sometimes posted well into the evening.

The S&P BSE IT index gained 445.53 points and technology, entertainment and media (TECK) index rose by 164.61 points, since the devaluation of yuan depreciated the Indian rupee. “China is the biggest or second-biggest market for many luxury brands”. That process “won’t be easily derailed by small [market] fluctuations or external events”, he added.

It set the yuan at 6.4010 against the U.S. dollar, down just 0.2% from the previous close and 1.1% weaker than Wednesday’s fixing.

Ms. Zhang, an assistant governor at the PBOC, gave rare guidance on the scale of the central bank’s targeted depreciation. “The one-time total depreciation of around 3% is largely finished … and is a necessary phase in exchange rate reform”.

Chinese observers credited the bank for moving against the panic, and said Beijing is acting no differently from any other nation.

The gap also narrowed between the offshore yuan and its onshore counterpart, an indication that the yuan is now more fairly valued – although the gap remains wider than in previous weeks. He oversees coverage of financial services and regulation.

But the International Monetary Fund has been pressing China for greater liberalization in the yuan to win membership. “However, the move has helped the IT and other exports-related stocks”. Dalmia pointed out that the Chinese government appeared to be more sensitive to the decline in their exports than the Indian government as they had acted with alacrity to arrest the decline in their exports by taking urgent steps like devaluing their currency.

“The resistance is getting stronger”, said an official close to the central bank.

China has emerged as major exporter of mildly beneficiated commodities, such as aluminum and steel products and refined fuels. The central bank said it acted because the Chinese currency was rising while market forces said should fall. However, investors must keep in mind the magnitude of China’s economy, he added. In the near term, the credibility of this official announcement will be judged by global investors.