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 pared declines in late trading to close 0.19 percent lower in Shanghai, following the steepest two-day drop since 1994. It was the second day in a row that at least one major Chinese bank sold dollars to influence the closing level, according to traders. The offshore yuan rebounded 1.1 percent in Hong Kong.
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 stabilize 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 U.S. interest rates. Keeping the yuan stable dented the competitiveness of Chinese exports and contributed to a $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 percent discount to the onshore level on Wednesday, before Thursday’s rebound narrowed the gap to 0.8 percent.
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.
Major banks were selling dollars at the 6.4-6.42 levels on Thursday morning, a trader said. At least one Chinese lender was seen selling the greenback toward the close, helping the yuan pare its losses by 0.3 percent in the final hour of trading. Authorities also sold the U.S. currency via state-owned banks to support the yuan on Wednesday, people familiar with the matter said. The yuan fell that day to as much as 1.9 percent weaker than the PBOC’s reference rate, near the limit of its permitted 2 percent trading range.
The yuan’s closing spot rate of 6.3990 per dollar on Thursday in Shanghai was about 0.03 percent stronger than the PBOC fixing, which fell 1.1 percent to 6.4010.
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, Yi said. “Trust the market, respect the market, fear the market, and follow the market,” he said.
A Bloomberg gauge of Asian currencies fell 0.1 percent. It tumbled the most since 2008 on Tuesday after the yuan’s 1.9 percent devaluation sparked concerns of a potential currency war. The won rose 1.4 percent, while Malaysia’s ringgit rebounded 0.8 percent 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 percent in a few days,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “If the yuan rate stabilizes today and tomorrow, then it may indicate the end of drama.”
— With assistance by Tian Chen, Justina Lee, and Xiaoqing Pi