China says no basis for yuan to fall further in effort to calm global markets
China's central bank said today that there was no basis for further depreciation in the yuan given strong economic fundamentals, in a bid to reassure jittery global markets after it devalued the currency earlier in the week.
As the yuan fell for the third straight day, the People's Bank of China (PBOC) said the country's 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 2pc sparked fears of a "currency war" and roiled global financial markets, dragging other Asian currencies to multi-year lows.
It also drew accusations from U.S. 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 policy-making process told Reuters that powerful voices within government were pushing for the yuan to go still lower, suggesting pressure for an overall devaluation of almost 10pc.
PBOC Vice-governor Yi Gang dismissed such talk as groundless.
But even if the central bank succeeds in putting a new floor under the yuan for now, weak July economic data and expectations of more interest rate cuts later in the year are likely to fuel expectations that authorities could allow it to slip further.
Fitch ratings agency said today 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 that many had questioned after Beijing's heavy-handed interventions to stem a plunge in its stock markets in June.
Vice-governor Yi said China would quicken the opening of its foreign exchange market and would attract more foreign investors as it liberalizes its financial markets.
Officials said the PBOC had stopped "regularly" intervening in the foreign exchange market but allowed that it could conduct "effective management" of the yuan in cases of extreme volatility.
Traders said major state banks had been buying yuan and selling dollars yesterday, causing the exchange rate to recover sharply in late trade, which influences the PBOC's official guidance rate for the following day.
Though the yuan opened slightly weaker on this morning, the gap between the guidance rate and the traded spot market rate closed sharply as the central bank tried to slow a sharp sell-off that has knocked around 3.2pc off the currency since Monday's close.
Tuesday's yuan devaluation followed a run of poor 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 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.
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 percent in 2014 to 7 percent this year, its slowest pace in a quarter of a century.