Yuan opens weaker on Wednesday after central bank cuts interest rates, bank reserve requirements

[SHANGHAI] China's yuan weakened early on Wednesday after aggressive monetary easing by the central bank on Tuesday evening.

The People's Bank of China set the midpoint rate at 6.4043 per dollar prior to the market open, its weakest level since August 2011, and firmer than the previous day's closing quote of 6.4124.

The spot market opened at 6.4181 per dollar and was changing hands at 6.4181 in early trade, 57 pips away from the previous close and 0.22 per cent away from the midpoint.

The spot rate is allowed to trade with a range 2 per cent above or below the official fixing on any given day.

The offshore yuan was trading -1.18 per cent away from the onshore spot at 6.495 per dollar.

In a long-awaited move which some economists said was overdue, the People's Bank of China (PBOC) said it was cutting the one-year benchmark bank lending rate by 25 basis points to 4.6 per cent and reducing reserve requirements (RRR) by 50 basis points to 18 per cent for most big banks.

Premier Li Keqiang was quoted by state television as saying that there is no basis for continued depreciation of the yuan on Tuesday.

The central bank stunned global markets by devaluing the currency by nearly 2 per cent on Aug 11 and then scrambled to stabilise it. However, many investors fear there is strong political pressure to allow it to slowly weaken further lower to boost weak exports and the cooling economy. "It is not the first time for China to roll out jumbo easing, however it is the first time for China to ease aggressively when the consensus view is shifting towards RMB depreciation. Therefore, we see a good chance that RMB may weaken further in both onshore and offshore market...," OCBC economists said in a research note. "This suggests that China's policymakers may have higher tolerance for RMB weakness. Nevertheless, given China's strong trade surplus, we see no basis for RMB to weaken significantly. Our call for a 6.30-6.50 range for USDCNY remains unchanged."

REUTERS