China tried Thursday to quell fears its yuan would fall further, saying it is close to market levels following declines that sparked fears of a “currency war” if other governments respond by pushing down their own exchange rates.
There is “no basis for persistent and substantial devaluation,” said a deputy central bank governor, Zhang Xiaohui, at a news conference. Zhang said the yuan is close to “market levels” after two days of declines.
The yuan fell 1.9 percent on Tuesday after a surprise change in exchange rate policy that Beijing said was aimed at making the tightly controlled currency more market-oriented. It fell again Wednesday and by midday on Thursday was down 0.3 percent. Those falls amount to a 3.1 percent drop for the week.
Thursday’s central bank comments came after analysts said allowing market forces free rein could drive the yuan sharply lower.
“It is very possible that we could see a 10 to 15 percent drop in the exchange rate against the U.S. dollar in the next week or two,” said Duncan Innes-Ker of The Economist Intelligence Unit in a research note.
Investors saw Beijing’s move as an effort to benefit its exporters but many economists rejected that view because global demand is weak.
The yuan’s decline was small compared with fluctuations of freely traded currencies. But after a decade of little or no movement, the change rattled financial markets and threatened to fan political tensions with Europe and the United States.
While the International Monetary Fund welcomed Beijing’s support for market forces, the change sparked complaints in Washington by lawmakers who accuse Beijing of manipulating its currency to gain a trade advantage.
“This move may also trigger a new currency war” if central banks respond by trying to depress their country’s own exchange rates, said Nicholas Teo of CMC Markets in a report.
Asian currencies declined Wednesday as the lower yuan weighed on prices in markets where China is a major trader. Malaysia’s ringgit and the Indonesia rupiah plunged to their lowest levels in 17 years. The Singapore dollar, Taiwan dollar and Philippine peso fell to five-year lows.
China is exporting “deflationary pressure,” said Morgan Stanley analysts Hans Redeker, Ian Stannard and Sheena Shah in a report.
Vietnam widened the band in which its currency, the dong, is allowed to fluctuate each day from 1 percent to 2 percent. That prompted suggestions Vietnam might be trying to help its exporters compete with Chinese goods.
On Wednesday, the Chinese central bank indicated it had no immediate plans to stop the yuan’s decline. It said the fluctuations would “converge to a reasonably stable zone” following a “short period of adaptation.”
Until now, Beijing set the yuan’s value each day based on a basket of currencies that is believed to be dominated by the U.S. dollar. That meant the yuan rose with the dollar over the past year, hurting Chinese exporters and raising the threat of politically dangerous job losses. Exports in July fell by an unexpectedly steep 8.3 percent from a year earlier.
The yuan, also known as the renminbi, is allowed to fluctuate in a band 2 percent above or below a rate set by the People’s Bank of China based on its currency basket.
The central bank said that starting Tuesday, the daily target will be based on the yuan’s closing the previous day and information from traders about currency supply and demand.
Tuesday’s change probably was the “start of an engineered depreciation,” said Mizuho Bank in a report.
China’s economic growth has slowed to an annual rate of just 7 percent, which is healthy for most countries but far below the previous decade’s double-digit pace.
