PBOC Expects More Yuan Fluctuations as Market Adapts to Fixing

Updated on

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 sell-off 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.”

Political Backlash?

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 exchange-rate 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.