This is China's central bank's explanation for what's happening with its currency

Photo by ChinaFotoPress/Getty Images

China’s PBOC – the centre of attention in recent days given its sudden decision to allow markets to play a greater role in setting the yuan’s trading level – has attempted to clarify the change in policy today.

Echoing similar sentiments to those expressed in a statement released Wednesday evening, the bank noted that a strong economic environment, sustained trade surplus, sound fiscal position and deep foreign exchange reserves will provide “strong support” to the exchange rate, according to Reuters.

It stated that the was no need for further depreciation in the yuan given strong economic fundamentals, adding the currency could resume its appreciation in the future.

It also denied that there was a need to adjust the yuan to promote China’s export competitiveness.

Over the weekend Chinese trade data for July revealed a contraction of 8.3% from levels of a year earlier.

It was significantly below market expectations for a decline of 1.0%.

On the decision to allow market forces to play a greater part in dictating the yuan’s level, Yi Gang, PBOC vice governor, outlined that a rigid exchange rate was not sustainable nor suitable for China.

On Tuesday the PBOC announced a change to the methodology used to determine the yuan’s fixing level. Instead of the bank solely determining the fixing rate, it announced that market participants, using the previous day’s closing level, would now play a greater role in determining the yuan’s initial trading level.

Yi noted that the bank was looking to further improve the yuan pricing mechanism to ensure more normal movements in the exchange rate.

Contradicting reports on Wednesday, he said the PBOC had stopped regularly intervening in the foreign exchange market.

He also rubbished claims that the bank was under pressure from government officials to see the yuan decline by 10% against the US dollar, calling the rumours “groundless”.

As if by magic the yuan, having been far weaker against the US dollar at the start of the press conference, rallied as PBOC officials spoke, with the USD/CNY falling to 6.4066 having been as high as 6.4422 earlier.

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