China's central bank doesn't see a need for the yuan to depreciate further

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China’s central bank – the PBOC – is attempting to restore calm to rattled financial markets.

In a statement released overnight the bank offered several reasons as to why there was no need for the yuan to depreciate further.

From Monday’s closing level the yuan weakened 3% in response to the PBOC changing the mechanism for establishing its daily opening level.

Instead of the bank solely determining the yuan’s fixing level, something that had been the case previously, the PBOC will now allow market forces to play a greater role in determining its opening level.

While it has caused market ructions, both in China and abroad, the bank believes the volatility of recent days will soon dissipate.

“After a period of adaptation the intra-day exchange rate movements and resulting central parity fluctuations will converge to a reasonably stable zone,” the bank said.

The PBOC also believe there are other factors at hand that will act to stabilise the currency.

“A relatively robust economy, current account surplus and the internationalization of the yuan will bring stability”, said the bank, according to a report from Chinese state run newspaper Xinhua.

“An internationalized yuan and open financial sector have boosted the demand for the currency, which also helps stabilization”, it said.

Ma Jun, chief economist at the PBOC, pointed out that the bank’s decision to allow market forces to play a greater role in setting the level of the exchange rate was partly in response to closing the “long-standing gap between the central parity rate and the previous day’s closing rate on the inter-bank market”.

The shift in the yuan’s level, in his opinion, is a one-off technical correction that should not be interpreted as an indicator of future depreciation.

Following the PBOC statement, it will be interesting to see what it has to say later in today’s session.

A previously unscheduled press conference will be held at 12.15pm Australian EST (10.15am Beijing), one hour after the bank announces the yuan’s Thursday fixing level.

You can imagine just how closely this event will be watched.

You can read more here.

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