China cuts currency rate but says 'no basis for depreciation to persist'

LONDON (ShareCast) - (ShareCast News) - The yuan depreciated for the third day running, as China's central bank set a marginally lower daily peg against the dollar, under a new market-oriented policy that was reiterated at a rare press conference on Thursday morning. The 1.1% adjustment by the People's Bank of China (HKSE: 3988-OL.HK - news) was smaller than the 1.6% and 1.9% in the two previous days as it continues its currency liberalisation process, and in the process helping the country's struggling exporters.

Late on Wednesday the PBOC intervened after the yuan weakened nearly 2%, its lowest level against the dollar for four years, ordering the country's banks to reduce buying pressure on the dollar, as it attempted to manage the currency's new flexibility.

In a rare move on Thursday, the central bank held a press conference early today to clarify its reasoning, reiterating that its primary goal as of Tuesday has been to give market-forces more say in setting the reference rate of its daily fix against the dollar.

This is part of the bank's planned liberalisation of the forex market ahead of a International Monetary Fund's decision on whether the yuan can be granted reserve currency status.

Assistant governor Zhang Xiaohui said that, having in recent months been resisting downward market pressure on the currency, giving the market a greater say would inevitably mean allowing some depreciation, and that the 3% fall this week was necessary to diffuse downward pressure on the currency that had built up recently.

Zhang stressed that there was now no basis for depreciation to persist and added that the bank will step in to control large, "irrational" fluctuations.

The bank explained that it was aiming for the yuan's onshore and offshore rates to move closer together, which, after this week's fixing method change, is now "basically already completed," said assistant governor Zhang Xiaohui, which further eased concern of more moves to push the renminbi lower.

However, Craig Erlam, analyst at Oanda, argued that he expected the PBOC to intervene more in the coming sessions given that the continued appetite for selling yuan.

The China team at UBS (NYSEArca: FBGX - news) said they did not think this would be a start of a sustained period of large depreciation. "We're expecting perhaps another 3-plus percentage points going forward. So now we see that RMB trading at around 6.5 by this year-end, rather than 6.3 as per our previous forecast." Capital Economics' China specialist Julian Evans-Pritchard said he felt the press conference confirmed the market was wrong about a 'new currency war' and the People's Republic was merely shifting to a more market-determined exchange rate after a four-month de facto peg that had prevented depreciation as the prospect of higher US interest rates buoyed the dollar.

"This should pour cold water on claims that the PBOC is trying to devalue the currency in order to shore up exports. A 3-4% fall won't make a meaningful difference to China's competitiveness and a larger scale weakening of the renminbi looks increasingly unlikely - the PBOC today described talk of a 10% or more depreciation in order to boost exports as 'nonsense'." Standard Chartered (HKSE: 2888.HK - news) strategist Eddie Cheung added: "The PBOC has drawn a line in the sand and given verbal guidance to the market. 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."