Market calm emerges amid China angst: here’s why

China cut the reference rate for its currency for the third straight day, on Thursday after the surprise devaluation of the yuan this week unsettled global financial markets. The PBoC also “dismissed claims it intended to weaken the yuan by 10% to support exports as ‘nonsense, ‘” according to Barclays.

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.

Beijing set the official exchange rate for the yuan 0.05pc higher against the dollar, a day after it sought to reassure markets that it was not engaging in a competitive devaluation. The renminbi had fallen Thursday to 6.3982 to the U.S. currency.

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

At a press conference in Beijing, the apex bank said the currency would strengthen again and there was no basis for continued depreciation in the yuan.

China devalued its currency on Tuesday after a run of poor economic data, a move it billed as a free-market reform but which some suspect could be the beginning of a longer-term slide in the exchange rate.

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.

The dollar edged higher on Friday against a basket of currencies on encouraging data on U.S. producer prices and industrial output, while euro ended a good week on a weak note even as the Greek parliament approved a new bailout agreement.

Chinese banks were also rumoured to be supporting the yuan by buying up the currency and selling dollars.

Finally, there’s the prospect it will force the U.S. Federal Reserve to rethink a widely expected interest rate hike this fall – a possibility that creates more uncertainties for financial markets.

The move to a more “market-oriented” policy, the PBoC is eyeing the possible inclusion of the renminbi in the worldwide Monetary Fund’s Special Drawing Rights (SDR) currency. “The sudden move on the part of China to devalue its currency yuan will have an adverse impact on India’s exports of textiles and clothing, which are facing already sluggish growth due to recessionary conditions in global markets”, Texprocil chairman R K Dalmia said in a statement here.

China’s rivals see it as a way to boost exports and prop up the market.