China’s central bank said yesterday there was no reason for the yuan to fall further given the country’s strong economic fundamentals, in a bid to reassure jittery global markets after it devalued the currency earlier in the week.
As the yuan slid for a third straight day, the People’s Bank of China (PBOC) said the strong economic environment, sustained trade surplus, sound fiscal position and deep foreign exchange reserves provided “strong support” to the exchange rate.
China’s decision to devalue the currency on Tuesday by pushing its official guidance rate down two per cent sparked fears of a “currency war” and roiled global financial markets, dragging other Asian currencies to multi-year lows.
It also drew accusations from US politicians that Beijing was unfairly supporting its exporters.
The PBOC said at the time that the move was a one-off depreciation, but sources involved in the Chinese policymaking process told Reuters that some powerful voices within government were pushing for the yuan to go still lower, suggesting pressure for an overall devaluation of almost 10 per cent.
State banks were also believed to be buying yuan and selling dollars yesterday
PBOC vice governor Yi Gang said it was nonsense to believe that government expected the yuan to fall that far.
Earlier yesterday, the PBOC said there was no basis for continued depreciation of the yuan. However, even if the central bank succeeds in putting a floor under the yuan for now, poor July economic data and expectations of more interest rate cuts later in the year are likely to fuel expectations that authorities could let it weaken further.
Fitch ratings agency said yesterday that the depreciation in the yuan “highlights wider pressures on the economy”, but also demonstrated that authorities remained committed to market-oriented reform, a commitment many had questioned after Beijing’s heavy-handed interventions to stem a plunge in its stock markets in June.
Traders said the central bank appeared to have been caught off guard by the intensity of selling that was sparked off by its surprise move on Tuesday, and believe it ordered big state banks to support the currency late on Wednesday, which influenced the PBOC’s official guidance rate for the following day.
State banks were also believed to be buying yuan and selling dollars yesterday.
Tuesday’s yuan devaluation followed a run of weak economic data and resulted in the biggest one-day fall since 1994, raising market suspicions that China was embarking on a longer-term depreciation of its exchange rate that would make Chinese exports cheaper.
Data on Chinese factory activity growth and retail sales underlined sluggish growth in the world’s second-largest economy, while fiscal expenditures jumped 24.1 per cent in July, reflecting Beijing’s efforts to stimulate economic activity.
Weighed down by weak exports, sluggish domestic demand and a cooling property market, growth in the world’s second-largest economy is expected to slow from 7.4 per cent in 2014 to seven per cent this year, its slowest pace in a quarter of a century.
China’s Ministry of Commerce, which sources said led the pressure within government for yuan depreciation, said it expected exports to see growth for the full year and was studying new measures to support trade.
The PBOC also said yesterday that it would monitor “abnormal” cross-border flows after the devaluation raised fears that investors would seek to pull capital out of China in anticipation of further falls in the currency.