China devalues yuan for third straight day

Echoing similar sentiments to those expressed in a statement released Wednesday evening, the bank noted that a strong economic environment, sustained trade surplus, sound fiscal position and deep foreign exchange reserves will provide “strong support” to the exchange rate, according to Reuters.

Previously, it said it based the fixing on a poll of market-makers, but declared it would now also take into account the previous day’s close, foreign exchange supply and demand and the rates of major currencies.

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.

The other theory is that this is another step in China’s efforts to “liberalize” its currency by letting the market play a greater role in determining its value.

“However, suggestions that China is engaging in a currency war could undermine the political goodwill towards it that will ultimately decide whether or not it is permitted to join”. “China is still a big unknown, and the market is pricing in the worst”, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

The Chinese authorities have stepped up reform of the exchange rate formation mechanism this week to make it more market-oriented, which is in line with the currency reform road map the country embarked on 10 years ago.

There is “no basis for persistent and substantial devaluation”, said a deputy central bank governor, Zhang Xiaohui, at a news conference on Thursday.

But in a surprise announcement on Tuesday, the central bank cut its daily reference rate by 1.9%, triggering the yuan’s biggest drop in over two decades. The previous rules allowed trading within 1 percent.

The volatility in the normally stable unit has raised concerns, and many analysts predict the yuan will continue to depreciate in the coming months, impacting global trade flows.

“Now since the Eurozone and UK are also very important trade partners of China, and China is facing diminishing export numbers in July, the devaluation could be justified”.

China will follow its own timetable in making the yuan convertible on the capital account, he said without elaborating. The yuan has remained largely stable against the U.S. dollar for a year at a little over 6 yuan to the dollar. Many economists also suspect a contributing factor: Beijing may be desperately trying to boost its economy. That meant the yuan rose with the dollar over the past year, hurting Chinese exporters and raising the threat of politically risky job losses.