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Yuan drop slows as PBOC intervention threat restores market calm
[BEIJING] The yuan's tumble eased as China's central bank signaled support for the currency, calming investors after a shock devaluation on Tuesday rattled global markets.
The onshore spot rate weakened 0.5 per cent as of 3:51 pm in Shanghai, following the steepest two-day drop since 1994. In offshore trading, it rebounded 1.2 per cent. The People's Bank of China intervened to support the yuan on Wednesday and major lenders sold dollars today, according to people familiar with the matter.
The PBOC said in a rare press conference that there's no basis for depreciation to persist and policy makers will step in to control large fluctuations. The speed of the currency's drop had sparked concern that it could threaten financial stability in the world's second-largest economy and ignite a round of competitive devaluations.
"The PBOC has drawn a line in the sand and given verbal guidance to the market," said Eddie Cheung, a strategist at Standard Chartered Plc in Shanghai. "If there are distortions, such as a very large gap between the onshore and offshore rates, the central bank will come in and stabilise the market." China is shifting to a more market-determined exchange rate from a de facto peg that prevented depreciation for four months, even as other emerging-market currencies weakened on the prospect of higher US interest rates. Keeping the yuan stable dented the competitiveness of Chinese exports and contributed to a US$315 billion decline in foreign-exchange reserves in the year through July.
Under the PBOC's new system to set the daily fixing, market makers who submit contributing prices must consider the previous day's close, foreign-exchange demand and supply, as well as changes in major currency rates. The International Monetary Fund, which is considering adding the yuan to its basket of reserve currencies, said the mechanism should allow market forces a greater role.
There is a "managed devaluation" under way and intervention risk remains high, said Christy Tan, National Australia Bank Ltd's head of markets strategy for Asia. The yuan "may from time to time be influenced by non-market forces, especially when volatility is high." The yuan's offshore rate fell to a record 2.1 per cent discount to the onshore level on Wednesday, before Thursday's rebound narrowed the gap to 0.4 per cent.
The PBOC said in a statement Thursday that it's aiming for the two rates to move closer together. The currency's adjustment after the fixing method change is "basically already completed," said Assistant Governor Zhang Xiaohui, easing concern of further moves to push the yuan lower.
Authorities in China sold dollars via state-owned banks to support the yuan on Wednesday and told lenders to limit some firms' purchases of the greenback, people familiar with the matter said. The yuan fell that day to as much as 1.9 per cent weaker than the PBOC's reference rate, near the limit of its permitted 2 per cent trading range, before paring losses amid the intervention. Major banks were continuously selling dollars at the 6.4-6.42 levels from 10:45 am Thursday, a trader said.
The yuan's latest spot rate of 6.4175 per dollar in Shanghai was about 0.2 per cent weaker than the PBOC fixing, which fell 1.1 per cent to 6.4010. The onshore currency is allowed to diverge a maximum 2 per cent from the official rate.
The current exchange rate is now more consistent with economic fundamentals, and there is no need to adjust it to boost exports, PBOC Deputy Governor Yi Gang said at Thursday's press conference.
The central bank has exited regular intervention, and will will act when the market's volatility is excessive, Mr Yi said. "Trust the market, respect the market, fear the market, and follow the market," he said.
A Bloomberg gauge of Asian currencies fell 0.2 per cent. It tumbled the most since 2008 on Tuesday after the yuan's 1.9 per cent devaluation sparked concerns of a potential currency war. The won rose 1.4 per cent, while Malaysia's ringgit rebounded 0.5 per cent from a 17-year low.
The PBOC comments "show that the yuan fall since Tuesday may be one-off, and the yuan is unlikely to fall another 5 per cent in a few days," said Zhou Hao, an economist at Commerzbank AG in Singapore. "If the yuan rate stabilises today and tomorrow, then it may indicate the end of drama."