Chinese central bank warns of continuing changes

What is really unusual, however, is that over the past year the U.S. has refused to defend its export market share, as the U.S. government has taken no official policy position on the value of its currency. Yet those gains would come at the expense of manufacturers in other countries, including the United States and Europe. Rather, these sensed a try by China to get yourself up to speed to a economical fact that requires an low-cost yuan. Some members of Congress have backed legislation to impose retaliatory tariffs.

The Ministry of Finance auctioned 30 billion yuan of seven-year notes at 3.50 percent, according to China Central Depository & Clearing Co.

The relative calmness in yuan trading has allowed markets to refocus on when the Fed could begin raising interest rates.

Analysts cautioned against seeing Beijing’s move as a direct effort to help Chinese exporters.

A detailed breakdown of the activity survey showed conditions were deteriorating by nearly every measure, with factory output sinking to a near four-year low, domestic and export orders declining at a faster rate than in July and companies laying off more workers.

The yuan’s devaluation caused a selloff in global stock markets and commodity markets, triggered by fears that China could launch a currency war to boost its sagging exports.

“European equity markets are taking their cues from China, and traders’ suspicion is that the second largest economy in the world is heading for a hard landing, ” said David Madden, market commentator at IG in London.

Clearly, market-determined exchange rates are a double-edged sword: they can lead to appreciation or depreciation from fair values, the latter defined as an exchange rate which would keep the current account in rough balance.

A weaker yuan might prompt complaints by foreign manufacturers. Meanwhile, there is no rush to reenact the Zimbabwean dollar, says Charity Dhiwayo, governor of the Reserve Bank of Zimbabwe.

The central bank will inject net 150 billion yuan into the open market this week.

“But the yuan’s rise will not be as significant as it was before”, Ding said. Until recently, the Bank would ignore the previous day’s trading when setting the new day’s price fix. Since August 11, one-week Shibor has jumped to 2.546 per cent, from 2.4 per cent.

It was also lower than Wednesday’s close, and comes after China adopted a more market-oriented method of calculating the currency rate in a move widely seen as a devaluation.

The situation is probably manageable under our base-case scenario, which is that the yuan gradually weakens further to 6.60 to the U.S. dollar in 12 months’ time.

“These injections imply that regulators are reluctant to use stronger monetary tools such as an RRR cut”, said a trader at a Chinese state-owned bank in Shanghai.