China strength­ens yuan against dol­lar, ends falls

The Pak Banker - - FRONT PAGE -

China's cen­tral bank on Fri­day raised the value of the yuan against the US dol­lar by 0.05 per­cent, the na­tional for­eign ex­change mar­ket said, end­ing three days of falls af­ter a sur­prise de­val­u­a­tion.

The daily ref­er­ence rate was set at 6.3975 yuan to $1.0, from 6.4010 the pre­vi­ous day, the China For­eign Ex­change Trade Sys­tem said.

The yuan closed at 6.3912 on Fri­day, strength­en­ing slightly from Thurs­day's close of 6.3982. The higher fix­ing for the yuan came af­ter the Peo­ple's Bank of China (PBoC) re­as­sured fi­nan­cial mar­kets by pledg­ing to seek a sta­ble cur­rency af­ter a shock de­val­u­a­tion of nearly two per­cent on Tues­day.

The cut, and two sub­se­quent re­duc­tions, sent global fi­nan­cial mar­kets into a tail­spin as it raised ques­tions over the health of the world's sec­ond-largest econ­omy and sparked fears of a pos­si­ble cur­rency war.

Bei­jing said the move was the re­sult of switch­ing to a more mar­ket-ori­ented method of cal­cu­lat­ing the daily ref­er­ence rate which sets the value of the yuan, also known as the ren­minbi (RMB).

Pre­vi­ously, author­i­ties based the rate on a poll of mar­ket-mak­ers, but will now also take into ac­count the pre­vi­ous day's close, for­eign ex­change sup­ply and de­mand and the rates of ma­jor cur­ren­cies.

The yuan is still only al­lowed to fluc- tu­ate up or down two per­cent on ei­ther side of the ref­er­ence rate. "Cur­rently, there is no ba­sis for the ren­minbi ex­change rate to con­tinue to de­pre­ci­ate," PBoC as­sis­tant gover­nor Zhang Xiao­hui said Thurs­day.

"The cen­tral bank has the abil­ity to keep the ren­minbi ba­si­cally sta­ble at a rea­son­able and bal­anced level," she said. Speak­ing ear­lier this week, another PBoC of­fi­cial said the cen­tral bank could di­rectly in­ter­vene in the mar­ket, af­ter re­ports it bought yuan on Wed­nes­day to prop up the unit.

"The cen­tral bank, if nec­es­sary, is fully ca­pa­ble of sta­bil­is­ing the ex­change rate through di­rect in­ter­ven­tion in the for­eign ex­change mar­ket," PBoC economist Ma Jun said.

China keeps a tight grip on its cur­rency on wor­ries sud­den fund out­flows or in­flows could cause more fi­nan­cial risk and chal­lenge its con­trol, but it has also pledged to move to­wards more flex­i­bil­ity.

Bei­jing is push­ing for the yuan to be­come one of the re­serve cur­ren­cies in the In­ter­na­tional Mon­e­tary Fund's SDR (spe­cial draw­ing rights) group.

Asian De­vel­op­ment Bank (ADB) chief economist Shang-Jin Wei said China has a "strong in­ter­est" in see­ing the yuan join the SDR bas­ket.

"Vir­tu­ally any eco­nomic pol­icy de­ci­sions by PBoC re­lated to cur­rency and the fi­nan­cial sec­tor should be viewed through this lens," he said in an ar­ti­cle posted Fri­day on the ADB web­site.

"If the Chi­nese author­i­ties choose to let mar­ket forces play a decisive role in de­ter­min­ing the fu­ture value of the cur­rency, this will be re­garded as a very pos­i­tive move."

Mean­while, China's yuan held steady against the dol­lar on Fri­day, but posted its big­gest weekly loss on record due to the cen­tral bank's sur­prise move to de­value its cur­rency.

The Peo­ple's Bank of China (PBOC) set the mid­point rate at 6.3975 per dol­lar prior to mar­ket open, firmer than the pre­vi­ous day's clos­ing quote 6.399. The spot mar­ket closed at 6.3918 per dol­lar, 72 pips away from the pre­vi­ous close and 0.09 per­cent away from the mid­point. The yuan fell by 2.9 per­cent for the week.

The yuan fell for three con­sec­u­tive days and had re­peat­edly touched fresh four-year lows since Tues­day, when the PBOC sur­prised the mar­ket by de­valu­ing the yuan by nearly 2 per­cent.

"We be­lieve that yuan may reach new equi­lib­rium at around 6.4-6.5 lev­els, but short term volatil­ity may re­main higher," said Suan­jin Tan, a port­fo­lio man­ager at Black­Rock.

Some banks re­vised down their forecast for the yuan to reach 6.5-6.6 by the end of the year. A poll con­ducted among 23 an­a­lysts showed that the yuan would fall to 6.45 in the next 12 months. The spot rate is cur­rently al­lowed to trade with a range 2 per­cent above or be­low the of­fi­cial fix­ing on any given day.

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