China vows not to devalue yuan
Repetition of standard language helps stoke speculation that central bank is ready to take tougher actions to halt currency plunge
Beijing — Top Chinese central bank officials vowed on Tuesday to keep the nation’s currency stable, helping to reverse declines and pledged that yuan devaluation would not be used as a weapon in the trade conflict with the US.
People’s Bank of China governor Yi Gang said China would "keep the yuan exchange rate basically stable at [a] reasonable and balanced level", a repetition of standard language that helped stoke speculation policymakers are prepared to take tougher actions to arrest the plunge in the currency.
Sun Guofeng, head of the central bank’s financial research institute, said that the currency’s decline was not due to China deliberately weakening it to gain an advantage over the US.
"Recently the yuan’s exchange rate has shown some weakness. This is entirely due to changes in market expectations as external uncertainties rise rather than intended guidance of the central bank, " Sun said.
"China upholds multilateralism, globalisation, free trade and rule-based international guidelines, and will not make the yuan’s exchange rate a tool to cope with trade conflicts."
The yuan has been the worst-performing currency in Asia over the past three weeks, losing 3.7% against the dollar as the domestic economy slows and the nation slides closer to a trade war with the US. A failure to contain the tumble will feed speculation that officials are effectively depreciating the currency to defend against the effects of trade tariffs. The yuan erased losses to advance in onshore and overseas markets after Yi’s comments.
"The [central bank] is sending a verbal warning and intervention that the recent slump in the yuan was too quick," said Zhou Hao, an economist at Commerzbank in Singapore. "In the short term, the yuan could strengthen as traders take profit from the recent slide. But if the market ignores the [bank] and keeps pushing the yuan weaker quickly, the central bank may conduct heavy intervention to send a stronger signal."
While there were no heavy-handed actions in the market, there were some signs of mild, suspected intervention in morning trade on Tuesday. Some major Chinese banks sold the dollar after the yuan slid past 6.7yuan/$, a move that strengthened the currency above that level, traders who asked not to be named said.
"The market sentiment is very one-sided. All the hedging and trading flows are all pointing to further weakening of the yuan," said Ryan Lam, head of research at Shanghai Commercial Bank. "The yuan is going through a very bad cycle now."
China’s economic fundamentals were sound and financial risks are controllable, Yi said, adding that the nation should stick with its foreign exchange policy of "managing a floating currency exchange rate mechanism, which is based on market supply and demand and with reference to the basket of currencies". The central bank will maintain a prudent, neutral policy stance, he said.
Policy makers were "confident" that the yuan can be kept basically steady, bank deputy governor Pan Gongsheng said.
The nation’s balance of payments was generally balanced, and it has much foreign reserves, rich experience and many policy tools, he added.
The onshore yuan rallied 0.24% to 6.65/$ in late afternoon trade in Shanghai, after posting its worst monthly plunge since 1994 in June.
The currency traded overseas was 0.39% stronger. The Bloomberg replica of the CFETS RMB Index, which tracks the yuan against 24 peers, fell for a tenth consecutive day, to 95.1.
"The central bank is ready to use stronger measures to turn the market trend, as further sharp depreciation of the yuan would drive the market to panic while the stock sentiment has already been poor," Tommy Xie, an economist from Oversea-Chinese Banking, said.
"Further weakness will be limited as the market is concerned about potential [bank] intervention."