Central Banks

PBoC quashes currency depreciation expectations

CNBC.com with Reuters
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China's central bank reiterated that there was no basis for continued currency depreciation, calling reports of a possible yuan drop of 10 percent "groundless."

At a closely-watched press conference in Beijing on Thursday, People's Bank of China (PBoC) vice governor Yi Gang also pledged to improve the yuan's pricing mechanism, Reuters reported. Foreign media outlets other than newswires were not permitted to attend the conference.

Officials said the central bank had the tools to keep the yuan stable, adding that the currency could even return to appreciation in the future. Ample foreign exchange (FX) reserves, a trade surplus and a sound fiscal position were factors cited to support a stable currency.

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Reuters reported that it had been informed by sources that "powerful voices within government were pushing for the yuan to go still lower, suggesting pressure for an overall devaluation of almost 10 percent."

But the PBoC vice governor dismissed such speculation, adding that there was no need to adjust the yuan to promote exports.

The comments saw the yuan pare losses to around 6.4 per dollar, from an earlier intraday high of 6.4422, while the benchmark Shanghai Composite traded down around 1 percent.

A shock devaluation announcement this week by the central bank has seen the yuan depreciate by about 3 percent in three days, fanning fears that that the currency could enter free-fall.

In a historic move for Beijing, officials devalued the currency by about 2 percent on Tuesday and said the daily spot rate would be set according to the previous day's closing central parity rate, effectively allowing the currency to trade freely. Indeed, the yuan weakened for a third consecutive day on Thursday as the central bank stuck to its promise.

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"A rigid yuan exchange rate is not suitable for China," PBoC vice governor Yi Gang told the press conference.

The decision to devalue the currency had been widely attributed to poor export data reported at the weekend. The data showed exports dropped 8.3 percent in July, the biggest fall in four months.

Today's press conference and Wednesday's intervention were signs that Beijing didn't want depreciation to get out of control, Mitul Kotecha, head of FX strategy for Asia Pacific at Barclays, told CNBC.

"The last thing they want is spiraling devaluation, but at the same time they are standing by their word," he said referring to the consistently weaker daily yuan fixings.

On Thursday the PBoC also expressed its desire for a unified onshore and offshore exchange rate, known as to the CNH and CNY, saying it wished to quicken the opening of its foreign exchange market and bring in more foreign investors. Yi Gang noted that the recent market volatility would not impact liberalization of the capital account.

Reports emerged late on Wednesday that the central bank asked state-owned lenders to on Wednesday in an effort to halt the yuan's slide. While the PBoC vice governor didn't directly acknowledge that report on Thursday, he did say the bank had stopped regular intervention in FX markets.