China ends three straight days of lowering the yuan

Zhang says there used to be a 3-percent gap accumulated between the official rate and market expectations.

China wants to expand use of the yuan by having it included in the SDR, an global reserve asset that now comprises four currencies: the U.S. dollar, euro, pound and yen.

“It’s likely the worst is over”, Patrick Bennett, a strategist at Canadian Imperial Bank of Commerce in Hong Kong, told Bloomberg News.

It was a natural decision after the yuan appreciated 10 percent against a basket of major currencies since 2014 and after China injected almost a trillion yuan to save a stock market slump in June, aggravating the yuan’s depreciation pressure, the central bank said.

China keeps a tight grip on the yuan, allowing it to fluctuate up or down just two percent on either side of the reference rate, which it sets daily.

The devaluation was engineered by Chinese authorities, and some analysts see it as a way to help China’s slowing economy by making its exports cheaper and therefore easier to sell overseas. The yuan was also down about 0.2 percent in worldwide trade at 6.4593 per dollar. Sentiment was soothed further by comments from the central bank.

The US has, in the past, sharply criticized China for keeping the value of the yuan artificially low, thus propping up its exporters at the expense of their US counterparts.

Economists had feared that the central bank was resorting to devaluing its currency in an attempt to shore up growth, as official GDP figures are widely believed to have been manipulated in an attempt to present a brighter picture of the Chinese economy.

Friday’s fix, in line with where the USD/CNY exchange rate closed on Thursday, fits with recent communication from the PBOC that it will allow market forces to play a greater role in setting the yuan’s opening level.

As previously reported, Chinese exports in July came in 8.3% lower than the prior year after fears that the strength of the yuan was rendering Chinese exports uncompetitive. It fell again on Wednesday and by midday on Thursday was down 0.3%.

The central bank said under a managed floating exchange rate system, the value of the yuan is determined by the market, and the bank can not intervene with this, but focuses more on improving the exchange rate formation mechanism.

“Currently, there is no basis for the renminbi exchange rate to continue to depreciate”, PBOC assistant governor Zhang Xiaohui said Thursday. The initial reaction out of the US to the original liberalization of exchange rates on Tuesday went in two directions.