China tried Thursday to ease fears of more big declines for the yuan as companies from global automakers to Chinese clothing exporters faced a new era of uncertain exchange rates.
There is “no basis for persistent and substantial devaluation,” said a deputy central bank governor, Zhang Xiaohui, at a news conference. Zhang said the yuan is close to “market levels” after two days of sharp declines.
By late Thursday in the U.S., the yuan was down 3 percent since Tuesday’s surprise announcement of a more flexible exchange rate. The People’s Bank of China said the change was aimed at making the tightly controlled yuan more market-oriented.
Many economists said the decline was too small to help Chinese exports due to weak global demand. But the change fueled concern the yuan might fall further, giving Chinese traders a price advantage over foreign rivals and possibly igniting a “currency war” if other governments fight back by depressing their own exchange rates.
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“The impact on foreign exporters is only beginning,” said Evan Lucas, a financial market strategist for the Australian firm IG Markets, in a report.
International traders have long coped with swings by the dollar, euro and other currencies. They can hedge, or insure against unfavorable changes, by signing contracts to buy them at fixed prices on future dates. Large manufacturers also put facilities in multiple locations, allowing them to switch production to lower-cost sites as currencies fluctuate.
On a larger scale, however, more flexibility could end the yuan’s status as a stable anchor among currencies of developing countries, said Rajiv Biswas, chief Asia economist for IHS.
If it leads to more devaluations, “it could increase uncertainty and turmoil in global currency markets,” said Biswas in an email.
At the news conference, the central bank’s chief deputy governor rejected suggestions Beijing planned to depreciate the yuan by up to 10 percent to help exporters.
“This is sheer nonsense. It is totally unfounded,” said the official, Yi Gang.
Financial markets responded to the central bank comments by boosting the yuan. The currency was down 0.8 percent at midmorning Thursday but after the news conference that narrowed to a 0.2 percent decline compared with Wednesday’s closing price.
“This should pour cold water on claims that the PBOC is trying to devalue the currency in order to shore up exports,” said Julian Evans-Pritchard of Capital Economics in a report. “A larger-scale weakening of the renminbi [yuan] looks increasingly unlikely.”
The global implications of a more flexible yuan are magnified by China’s status as the world’s No. 2 economy and biggest exporter, the top trading partner for most of Asian neighbors and also a competitor with Japan, Korea, Thailand and others in foreign markets for steel, shoes, toys and other goods.