Daily Management Review

Chinese Central Bank Tries to Sooth Markets, Says Further Fall in Currency Unlikely


Chinese Central Bank Tries to Sooth Markets, Says Further Fall in Currency Unlikely
After devaluing the yuan for three consecutive days earlier this week and sending jitters through the global markets, the Chinese central bank on Thursday tried to install some confidence among the world market by that there was no reason for the yuan to fall further given the country's strong economic fundamentals.

“The the strong economic environment, sustained trade surplus, sound fiscal position and deep foreign exchange reserves provided strong support to the exchange rate,” said the People's Bank of China (PBOC) in communiqué on Thursday even as the Chinese currency continued to slide three days in a row.  

Fears of a currency war raked the economic world as China devalued its currency by 2 percent on Tuesday and pushed down its official guidance rate for the yuan as markets across the globe, especially the Asian markets and the currencies fell to record lows.

The move is seen as a strategy by the Chinese authorities to strengthen it exports and provide support to the exporters, a move that has been criticized by the US saying that China was ‘unfairly supporting its exporters’.

Though the PBOC had said that the devaluation move was a one off measure and the yuan would not be devalued further, reports in the global media, quoting Chinese sources, said that the Chinese currency is slated to fall further to a total slide of 10 percent under pressure from some powerful voices within the Chinese government insiders and the Chinese policy makers.  

PBOC Vice-governor Yi Gang blew away the criticism and the speculations of claiming that it was “nonsense” to believe that government expected the yuan to fall that far. The bank said on Thursday that there would be no basis for continued depreciation of the yuan.

There are however anticipation of a further weakening of the yuan despite the assurances of the Chinese central bank due to the poor July economic data and expectations of more interest rate cuts later in the year.

Meanwhile, global analyst firms have sounded caution at the three day long fall I the Chinese currency.

On Thursday, Fitch ratings agency said that the depreciation in the yuan "highlights wider pressures on the economy". However the agency also noted that the present moves suggest that the Chinese authorities were committed to the market-oriented reforms, a characteristic that was criticised in June after the authorities had intervened in a heavy-handed manner to stem prevent a significant fall in its stock markets.  

“China would quicken the opening of its foreign exchange market and would attract more foreign investors as it liberalizes its financial markets,” said Vice-governor of PBOC.

In recent years, the Chinese central bank had stopped regular market interventions even as the bank had retained the option of conducting "effective management" of the yuan in cases of extreme volatility.

The weak economic data that was revealed on Thursday coupled with the yuan devaluation resulted in the biggest one-day fall since 1994 in the Chinsese market that raised speculations about Chinese economy getting into a longer-term depreciation of its exchange rate that would make Chinese exports cheaper.

Chinese factory activity growth data put out on Wednesday indicated slow growth while an increased fiscal expenditure showed the attempts of the Chinese government to stimulate the market and the economic activity through spending.

(Source: www.reuters.com)