China Needs to Act First to Stop Rout

Most other Asian currencies managed to rebound, and stock and commodity markets picked up. But the International Monetary Fund has certainly noticed, suggesting that “a more market-determined exchange rate would facilitate SDR operations, in case the renminbi were included in the currency basket going forward”.

The yuan has been one of the strongest currencies in the world for years, as its nominal effective exchange rate has appreciated 46 percent since China initiated forex reforms by depegging the yuan from the U.S. dollar in July 2005.

The yuan stabilized yesterday after the bank said it could remain strong over the long term.

China’s surprise devaluation of its currency this week triggered fears about waning competitiveness of Asia’s exporters and cast fresh doubt on the health of the Chinese economy. It fell again on Wednesday and by midday on Thursday was down 0.3%.

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.

In addition, China has wanted its currency to be accepted internationally.

Over the past three days, the value of the yuan (formally, the renminbi) has fallen by only 4.4% relative to the dollar, but all sorts of attention has been drawn to the event throughout the world.

The Chinese central bank’s “opaque communications policy may well have led to panic over-selling earlier in the week”, market analyst Angus Nicholson of IG said in a commentary.

Some Chinese agencies have begun to assume the yuan will weaken further to 7 against against the US dollar by the year’s end in their research, Bloomberg reported, citing unnamed sources.

The euro was last down 0.16 percent against the dollar at $1.11410.

CURRENCIES: The dollar rose to 124.51 yen from 124.26 yen in late trading Wednesday. Industrial and Commercial Bank of China offers a one-year deposit rate of 2.25 percent, or just slightly above the benchmark rate.