China allows its currency to drop for a third day

China allows its currency to drop for a third day

Banking sources said the People’s Bank of China had stepped up its intervention in yuan trading in a bid to stabilise exchange rates.



Tuesday’s sudden, surprising move by the Chinese government to devalue the renminbi by nearly 2 percent against the US dollar was the biggest one-day decrease in the value of that currency against the greenback in over 20 years.

The PBOC also said on Thursday 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. Massachusetts described the yuan’s current rate as “near equilibrium”.

Kit Juckes, of Societe Generale, said that he expected the Chinese economy to continue slowing, such that, “albeit at a more measured pace and with less fanfare than this week, we’ll see more yuan weakness in the weeks and months ahead”. But after a decade of little or no movement, the change rattled financial markets who feared China might be prepared to engage in a currency war with the US and Europe.

China aggressively cut the yuan’s value for a third day in a row on Thursday, taking it to a four-year low.

China’s central bank pledged to maintain a stable and “reasonable” exchange rate for the currency, while also making it more market-oriented.

The daily reference rate was set at 6.3975 to the dollar, from 6.4010 on Thursday.

It said the previous “flawed mechanism failed to stay true to market realities and caused wide differences between the central parity rate and real market rates, mounting huge depreciation pressure on the central parity rate”.

Traders said the central bank appeared to have been caught off guard by the intensity of selling that was sparked off by its surprise 2 percent devaluation on Tuesday, and believe it ordered big state banks to support the currency late on Wednesday. Central to this is a bid to have the yuan accepted by the worldwide Monetary Fund into its basket of reserve currencies, placing the yuan on par with the dollar, euro, yen and British pound, and boosting China’s global stature.

“The 2 or 3 percent devaluation of the yuan [against the U.S. dollar] is completely meaningless”, Faber said.

Copper advanced 1.1 percent to $5 246.50 a metric ton on the London Metal Exchange, while nickel, lead, zinc and tin added at least 0.4 percent.

“I think the yuan has become overvalued as other countries tried to cheapen their currencies and it will keep falling, playing catch-up”, he added. U.S. stocks were poised to open higher with Dow futures and the broader S&P 500 future set for gains of 0.3 percent at the bell.

A lower yuan could prompt the European and Japanese central banks to step up their monetary stimulus to an even greater level

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