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August 14, 2015

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Home » Business » Economy

Bank: No reason for yuan to fall further

THERE is no reason for the yuan to fall further given the country’s strong economic fundamentals, China’s central bank said yesterday, reassuring the market after the currency’s devaluation earlier in the week.

The yuan stabilized yesterday after the bank said it could remain strong over the long term. It closed at 6.3990 per US dollar on the onshore market, 0.2 percent weaker than Wednesday but stronger than yesterday’s official daily fixing of 6.4010.

It touched as low as 6.45 in the morning but rebounded after the central bank said the country’s strong economic environment, sustained trade surplus, sound fiscal position and deep foreign exchange reserves provided the exchange rate with “strong support.”

“The yuan remains a strong currency over the long run,” said Zhang Xiaohui, assistant to the governor of the People’s Bank of China. “After the correction in the past two days, the yuan is returning to the market level.”

Zhang said the former fixing rate was about 3 percent off domestic and international market expectations, and the deviation had been basically fixed so far.

The yuan had depreciated 3 percent in the past three days after the devaluation move.

Yi Gang, deputy central bank governor and head of the State Administration of Foreign Exchange, rejected suggestions China planned to depreciate the yuan by up to 10 percent to help exporters.

“This is sheer nonsense. It is totally unfounded,” Yi told a news conference.

It was a natural decision after the yuan appreciated 10 percent against a basket of major currencies since 2014 and after China injected nearly a trillion yuan to save a stock market slump in June, aggravating the yuan’s depreciation pressure, the central bank said.

HSBC said in a note yesterday that it did not believe China was adopting a yuan devaluation strategy and said the change in the yuan fixing mechanism would not alter plans to internationalize the currency.

“We agree with the central bank that the one-off adjustment seems to be nearing completion,” HSBC said. “After two days of an aggressive adjustment, onshore spot opened very close to today’s fixing rate, while the onshore and offshore basis has narrowed significantly from above 1.3 percent to 0.33 percent level.”

The bank forecast that the yuan would dip to 6.50 per US dollar at the end of the year due to continued demand for the US dollar on expectations of a US economic recovery and a rise in interest rates by the Federal Reserve.

Financial markets responded to the central bank comments by boosting the yuan. The currency was down 0.8 percent at midmorning but that narrowed to a 0.2 percent decline after the comments, compared to Wednesday’s closing price.

“This should pour cold water on claims that the PBOC is trying to devalue the currency in order to shore up exports,” The Associated Press quoted Julian Evans-Pritchard of Capital Economics as saying. “A larger-scale weakening of the renminbi looks increasingly unlikely.”

The move toward more flexibility at a time when market pressures were set to push the yuan down left Washington and other trading partners that have criticized China’s currency controls off balance, AP said. They have urged China for years to switch to a market-based system but assumed that would cause the yuan to rise and help their own exporters.

That leaves the US government in an “awkward and difficult” position, Eswar Prasad, a professor of trade policy at Cornell University, told AP.

“A falling yuan and a rising bilateral US trade deficit with China will sharpen congressional criticism of China’s currency policies,” he said. “But the administration has no economic basis for criticizing China’s move.”


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