China’s Reckless Self-Interest Rattles Asia

Asian stock markets stabilized Thursday as the fall in the Chinese yuan slowed and the country’s central bank tried to dampen speculation of further devaluation.

Panic calmed yesterday after the PBOC reiterated its commitment to supporting a strong and stable yuan. Even after this week’s rise, it remains 47 basis points lower than that peak, thanks in part to a net 55 billion yuan ($8.59 billion) injection over the past seven weeks through the central bank’s open market operations.

The PBOC has stopped “regularly” intervening in the foreign exchange market but could still conduct “effective management” of the yuan in cases of extreme volatility, Yi said. Still, most economists suspect the yuan’s drop won’t have much of a lasting impact. Sentiment was soothed further by comments from the central bank.

The spot rate is now allowed to trade within a range of 2 percent above or below the official fixing on any given day, and had been consistently trading over 1 percent weaker than the midpoint since March.

“Our modelling work suggests Fed tightening would be delayed and slower, with US 10-year yields dropping back below 2 per cent in 2016-17″, said Marcos Casarin from the forecasting firm Oxford Economics. “A single move might have passed without reaction from China’s trading partners, but now it looks like a tit-for-tat move by others in the region is certain”.

Analysts viewed the move as a way for China to both boost exports by making its goods cheaper overseas and push economic reforms as it seeks to become one of the reserve currencies in the global Monetary Fund’s SDR (special drawing rights) group.

On Tuesday, the People’s Bank of China, the central bank, made a significant shift in how it manages the yuan by allowing markets to play a bigger role in valuing the currency.

Data on Chinese factory activity growth and retail sales on Wednesday underlined sluggish growth in the world’s second-largest economy, while fiscal expenditures jumped 24.1 percent in July, reflecting Beijing’s efforts to stimulate economic activity.

“I think the central bankers have given people a reason to believe they’re not that anxious”, said Jason Pride, director of investment strategy at Glenmede, a money management firm.

Beijing said the move was the result of switching to a more market-oriented method of calculating the daily reference rate which sets the value of the yuan, also known as the renminbi (RMB).

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