Why U.S. Markets Are Taking a Weakening Yuan in Stride

Here's something new: China on Wednesday just set the reference rate for the yuan at the lowest level since 2011. And global markets took it in stride.

While Chinese stocks logged moderate losses Wednesday, equity markets in many other parts of Asia strengthened, so did European and U.S. stocks. Meanwhile, prices of safe-haven assets such as U.S. government bonds and gold were both lower.

The calm tone stands in stark contrast to previous periods of weakening for the yuan during the past 12 months. China's devaluation of its currency in August rattled global markets. In early January, a selloff in the Chinese yuan and the nation's stock market also generated market turmoil.

While a weaker yuan helps boost Chinese exports, it generates capital flight, pushes up borrowing costs in dollars for Chinese firms, mounts downward pressure on other emerging-market currencies and raises the specter of deflationary pressure in the global economy.

But this time a weaker yuan hasn't unnerved investors. Stocks have held their ground even as the dollar has regained ground in recent weeks.

Analysts say China's move on the yuan has been orderly and moderate and that they don't anticipate a large one-off devaluation like the one in August for the foreseeable future.

The People’s Bank of China on Wednesday set the yuan reference rate at 6.5693 against the dollar, the lowest level since March 2011. But that level was only 0.3% weaker than a day ago, compared to a 1.9% devaluation of the yuan on Aug. 11, the most in two decades.

The yuan trading in offshore market--where investors freely buy or sell the currency--was little changed Wednesday. One dollar bought 6.5647 yuan, according to data provider CQG. That's up from this year's low of 6.4429, but still below it's 2016 peak of 6.7521 on Jan 7.

The PBOC is "not going to be aggressive with the fixings" on the yuan's value, said David Zervos, chief market strategist at Jefferies LLC.

Mr. Zervos pointed to the front-page article on Tuesday's Wall Street Journal, which suggested that China’s top leaders have lost interest in a major policy shift announced in a surprise move just nine months ago.

"The fat tail risk of a Chinese currency led 15% dump in [U.S. stocks] just got skinnier,'' he said. Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said that the market was "spooked" in August and earlier this year by not only what China was doing but also "the uncertainty of intentions."

Now, said Mr. Chandler, the market "is no longer spooked." He added that the market has "discounted a weak yuan," as he believes that Chinese firms have been paying down dollar debt. He added that foreign interest in yuan-denominated bonds sold outside China-known as dimsum bonds, and Chinese stocks has waned.