China allows yuan currency to drop for third day

It also compounded jitters over China’s financial health after a debt-fuelled stock market bubble burst in June, following a 150 percent surge in the previous 12 months.

The bank set the value of yuan at 6.2298 a dollar, 1.9 percent lower than Monday’s official fixing rate.

The central bank put the yuan’s central parity rate at 6.4010 yuan for $US1, the China Foreign Exchange Trade System said, a drop of 1.11% from the previous day’s 6.3306.

While Chinese exporters are expected to benefit from the weaker currency, airline companies, property firms, luxury goods, commodity prices and other Asian currencies are set to bear the brunt of the devaluation. Massachusetts described the yuan’s current rate as “near equilibrium”.

China’s decision to move to a more market-oriented exchange-rate mechanism has rocked markets this week, triggering losses among developing-economy currencies and spurring a rush to havens such as bonds and the yen.

Some commentators fear that the devaluation could spark a global “currency war”. “If it does, that will undercut arguments that this is a one-way move to promote exports and manipulate the currency”, said Scott Kennedy, director of Project on Chinese Business and Political Economy at the Center for Strategic and worldwide Studies think tank.

And according to the Bank of global Settlements, China’s effective exchange rate has appreciated by more than 13 percent in the past year alone.

The move, explained as a re-pegging of the midpoint fixing closer to the market rate, led the currency to fall around 3 percent in massive volumes.

Chinese shares closed higher on Thursday as fears of further currency depreciation subsided following the central bank’s reassurance that the yuan’s value has “returned to market levels” after days of sharp correction. Rumours that Beijing was seeking a 10 per cent devaluation of the yuan were described as “sheer nonsense” and “totally unfounded” by deputy governor Yi Gang.

In China, after 5 minutes of trade, the benchmark Shanghai Composite index has risen 0.4%.

“China does want to be recognized as a member of the Big Boys Club when it comes to currencies and the International Monetary Fund seal of approval would be important there”, says Eswar Prasad, an economics professor at Cornell University.

The unexpected rate cuts have puzzled worldwide observers, with experts saying that China is putting the desire to jump-start its slowing economy ahead of its hopes to gain broader acceptance of the yuan. “The markets have now digested the prospects of a CNY devaluation and are judging it as not as big of a risk as earlier”.

But the volatility in the normally unusually stable unit has raised concerns, and Bloomberg News reported Wednesday the central bank had intervened in the market to prop it up.