Central Bank Assures No More Further Depreciation of the Yuan
The central bank said that there is no basis for the further depreciation of the yuan after strong economic fundamentals gave a bid to reassure a struggling global market after devaluing the currency just earlier this week. As the yuan fell for the third time the People’s Bank of China stated that the strong economic environment, sound fiscal position, sustained trade surplus and a deep foreign exchange gave a strong support to the yuan exchange rate.
The country’s decision to devalue its currency by pushing the guidance rate down by 2 percent placed fears of a currency war and riled the global financial markets, which dragged other Asian currencies to a all time low. The People’s Bank of China stated that the move is a one off depreciation but those involved in the policy making process said powerful authorities were pushing for the yuan to go even lower which suggested to an overall devaluation of 10 percent. And even if the central bank succeeds in placing a new floor under the yuan, weak economic data and more interest rates cuts later is likely to fuel expectations that the yuan will be allowed to slip down further.
Depreciation the yuan more highlights wider pressure and demonstrates the authorities commitment to market oriented reform and China will quickly open its foreign exchange market and hope to attract foreign investors as it free up financial markets. As the People’s Bank of China stop intervening in the foreign exchange market although its allowing effective management of the yuan if it goes into extreme volatility.