PBOC sees more yuan fluc­tu­a­tions as mar­ket adapts to fix­ing

The Pak Banker - - COMPANIES/BOSS -

China's cen­tral bank said there's no eco­nomic ba­sis for the yuan to fall con­tin­u­ously, af­ter its move to give mar­kets more sway in set­ting the level spurred the big­gest sell­off in two decades.

Just min­utes af­ter the Peo­ple's Bank of China low­ered the daily fix­ing price by 1.6 per­cent on Wed­nes­day, spurring a sec­ond day of selling, it ac­knowl­edged in a state­ment that there'll be a "short pe­riod of adap­ta­tion" to its new price mech­a­nism.

It said fluc­tu­a­tions are a "nor­mal phe­nom­e­non" and that it will strive to fur­ther im­prove mar­ket-based set­tings and keep the ex­change rate "ba­si­cally sta­ble."

"Re­cently, ma­jor eco­nomic in­di­ca­tors sta­bi­lized and showed good signs, which pro­vides a fa­vor­able macroe­co­nomic en­vi­ron­ment for a sta­ble" cur­rency, the Peo­ple's Bank of China said. China's trade sur­plus is another "fun­da­men­tal fac­tor" sup­port­ing the yuan. The com­ments came as China's cur­rency headed for its big­gest two-day drop in 21 years af­ter the ref­er­ence rate was cut to the weak­est level since 2012. An­a­lysts from Credit Suisse Group AG to BNP Paribas SA de­bated just how far the PBOC will al­low the yuan to weaken.

"A 5 per­cent or even 10 per­cent fall is quite pos­si­ble," said Chen Chen Xing­dong, chief China economist and head of macro-eco­nom­ics re­search at BNP Paribas in Bei­jing. "But the cen­tral bank will in­ter­vene even­tu­ally -- it's not a ma­ture mar­ket and it's up to the cen­tral bank to main­tain sta­bil­ity."

The yuan will end up de­pre­ci­at­ing some­where be­tween 3 per­cent and 10 per­cent, Credit Suisse an­a­lysts wrote in a note. "As the RMB is 5 to 10 per­cent over­val­ued based on ex­port mar­ket share, a large de­pre­ci­a­tion would threaten a po­lit­i­cal back­lash," they wrote. Mean­while, the PBOC is able to con­trol the de­pre­ci­a­tion as it has huge for­eign ex­change re­serves at its dis­posal.

The PBOC may start to in­ter­vene when the yuan/dol­lar cross rate reaches the level of 6.7, said Andy Ji, a Sin­ga­pore-based strate­gist at the Com­mon­wealth Bank of Aus­tralia. "On a real ef­fec­tive ex­chang­er­ate ba­sis, the on­shore yuan is over­val­ued by 5-7 per­cent," Ji said.

The PBOC also cited ris­ing de­mand for yuan as­sets from over­seas in­vestors, the pric­ing in of the Fed­eral Re­serve's an­tic­i­pated in­ter­est rate in­crease this year, China's for­eign ex­change re­serves and its sta­ble fis­cal sit­u­a­tion as rea­sons that should bol­ster a steady cur­rency sit­u­a­tion. The bank said "we should take an ob­jec­tive view" to ex­change rate fluc­tu­a­tions.

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