China drops value of the yuan against dollar for third day

Though the yuan CNY=CFXS opened slightly weaker on Thursday, the spot rate was only about 0.1 percent below the guidance rate CNY=SAEC, the closest it has been since November, as the central bank tried to slow the sharp sell-off that has knocked around 3.2 percent off the currency since Monday’s close.

Market watchers speculated the PBOC sought to make Chinese-made goods cheaper for foreign buyers at a time its exports have weakened.

“We expect the currency to continue to depreciate over the next few days, given downward pressures… suggesting that the Chinese economy is slowing again”, said Susan Joho, an economist at the private bank Julius Baer.

ASIA’S DAY: Japan’s Nikkei 225 finished 0.4 percent lower at 20,519.45 while Hong Kong’s Hang Seng was down 0.1 percent at 23,991.03.

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 surprise move earlier this week to loosen the mechanism that controls the yuan and send the currency lower reverberated through global markets but the turmoil is now abating.

PBOC Vice-governor Yi Gang dismissed such talk as groundless. The central bank said it will step in when the market sees excessive volatility or becomes swayed by herd behavior.

But after a decade of little or no movement, the change rattled financial markets who feared China might be prepared to engage in a currency war with the US and Europe.

By devaluing the yuan, the Chinese government was catching up to the market, not trying to counteract it.

The U.S. dollar gained back some ground on Thursday after China’s central bank said there was no basis for further depreciation of the yuan, refocusing attention on the likelihood of a Federal Reserve interest rate increase in September.

Banking sources said the People’s Bank of China had stepped up its intervention in yuan trading in a bid to stabilise exchange rates.

The central parity rate for Thursday was fixed at 6.4010, which was lower by 1.1 percent from Wednesday. Following the PBOC’s reassurance of yuan stability, stocks rallied during afternoon trading, with almost 200 shares rising by the 10-percent daily limit.

China’s first major devaluation since 1994 shocked global investors on Tuesday as the PBOC said it would let the market play a bigger role in determining the yuan’s level.

Quoted by the official Xinhua news agency, he said China did not need to start a currency war to boost its exports given that they were expected to pick up in the second half of the year.