China ends three days of yuan devaluation

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BEIJING: China’s central bank has raised the value of the yuan against the US dollar by 0.05%, ending three days of falls in a surprise series of devaluations.

The daily reference rate was set at 6.3975 yuan to $1.0, from 6.4010 the previous day, the China Foreign Exchange Trade System said. That was also slightly stronger than Thursday’s close of 6.3982 yuan.

The higher fixing for the yuan came after the People’s Bank of China (PBoC) sought to reassure financial markets by pledging to seek a stable currency after a shock devaluation of nearly 2% on Tuesday.

The People’s Bank of China (PBOC) said on Thursday that there are no grounds for persistent and substantial depreciation of the yuan in the long run while vowing to step in to prevent excessive swings.

“The central bank is capable of keeping the exchange rate basically stable at an adaptive and equilibrium level,” said Zhang Xiaohui, PBOC assistant governor.

The PBOC on Tuesday adjusted the exchange rate formation system to better reflect market development by closing the gap between a lower central parity rate and higher market expectations.

The yuan has been one of the strongest currencies in the world for years, as its nominal effective exchange rate has appreciated 46 percent since China initiated forex reforms by depegging the yuan from the U.S. dollar in July 2005.

The improved mechanism takes into consideration the closing rate of the interbank forex market on the previous day, as well as supply and demand in the market, and price movement of major currencies.

The market reacted with surprise as the falling yuan led to a heavy sell-off in regional currencies, declines in Asian stocks and downward bulk commodities prices, as well as claims that the depreciation of the yuan was being engineered by China to rescue sluggish exports.

However, the central bank’s move is probably not significant enough to make much difference to either exporters or buyers of Chinese exports.

Central bank economist Ma Jun said China does not need to start a currency war to gain advantage as trade is expected to pick up in the second half. Ma described the yuan’s current rate as “near equilibrium.”

A research note from HSBC also said the new forex policy is part of China’s strategy to liberalize the yuan rather than a tool to support growth.

The International Monetary Fund (IMF) described the new policy as “a welcome step” that allows market forces to have a greater say in forming the exchange rate.