China’s Central Bank Gives Verbal Support to Yuan

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China’s Yuan Support Ends 2-Day Rout

China’s central bank stepped up verbal support for the yuan and said it will take action when there’s excessive volatility. The currency stemmed its worst loss in two decades.

There’s no basis for the depreciation to persist, People’s Bank of China Assistant Governor Zhang Xiaohui said at a rare briefing on the currency in Beijing. The adjustment spurred by Tuesday’s change to how the PBOC determines the yuan’s daily reference rate is basically already completed, she said.

The PBOC will act “when the market’s volatility is excessive, when the market begins behaving like a herd of sheep,” Deputy Governor Yi Gang said. “Trust the market, respect the market, fear the market, and follow the market.”

China’s decision Tuesday to allow markets greater sway in setting the currency’s level triggered the biggest selloff in 21 years and roiled global markets. Thursday’s comments were made after the fixing rate dropped 1.1 percent, after slides of 1.6 percent and 1.9 percent in the past two days. The yuan pared losses, trading at 6.4115 against the U.S. dollar at 1:43 p.m. local time.

The PBOC made the shift after months of stability against a strengthening U.S. dollar had seen China lose competitiveness against other Asian nations, weighing on exports. Currency reserves have slumped $315 billion in the year to July to $3.65 trillion as the central bank kept the exchange rate stable.

New Methodology

Tuesday’s shift saw the PBOC apply a new methodology to determine the fixing: market makers who submit contributing prices have to consider the previous day’s close, foreign-exchange demand and supply, and changes in major currency rates. The new mechanism is beneficial to long-term stability, Yi said.

The PBOC will promote a consistent onshore, offshore yuan exchange rate, it said in a statement delivered ahead of the press briefing. A managed floating exchange rate regime is suitable for China, Yi said.

The current exchange rate level is consistent with economic fundamentals, he said. A flexible exchange rate will increase room for the central bank to adjust monetary policy, Yi said. “Now, liquidity is ample and interest rates are stable on the market.”

(An earlier version of this story was corrected to change the translation and attribution of quotes.)

— With assistance by Xiaoqing Pi, Heng Xie, and Kevin Hamlin

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