China’s Yuan Rate Rises for First Time Since Devaluation 

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The yuan halted a three-day slide after China’s central bank raised its reference rate for the first time since Tuesday’s devaluation and said it will intervene to prevent excessive swings.

The onshore spot rate was little changed at 6.4003 per dollar as of 12:56 p.m. in Shanghai, after falling 3 percent this week. The People’s Bank of China said Thursday there’s no basis for depreciation to persist and that it will step in to curb large fluctuations. It followed up with a 0.05 percent strengthening of its daily fixing on Friday, after three cuts of more than 1 percent each.

China’s first major devaluation since 1994 surprised global investors and fueled concern that authorities are struggling to combat a slowdown in the world’s second-largest economy. Policy makers are trying to balance the need for financial stability against a desire for stronger exports and the yuan’s inclusion in the International Monetary Fund’s basket of reserve currencies.

“The PBOC sent its signal and people understand it’ll be very difficult to go against the PBOC’s will,” said Ken Peng, a Hong Kong-based strategist at Citigroup Inc., the world’s biggest currency trader. “The central bank will frequently intervene in the foreign-exchange market in the next three months because it needs to ensure the yuan is stable.”

Global Influence

Under a new methodology used to determine the reference rate, market makers who submit contributing prices have to consider the previous day’s close, foreign-exchange demand and supply, as well as changes in major currency rates, the PBOC said on Tuesday. Policy makers didn’t elaborate on the central bank’s role in setting the fixing.

Where the yuan goes from here will have an impact not only on growth prospects for Asia’s largest economy, but also the Federal Reserve’s interest-rate policy and earnings at international companies from Caterpillar Inc. to Prada SpA. Further weakness could make dollar-denominated debt more expensive for Chinese borrowers, exacerbate capital outflows and put pressure on export rivals to devalue their currencies.

“They’re OK with a modest depreciation, but they don’t want the depreciation to get out of hand,” said Dennis Tan, a currency strategist at Barclays Plc in Singapore.

On the day of the devaluation, the yuan tumbled 1.8 percent in Shanghai, the most in two decades. The move rippled through global markets, sending developing-nation stocks into a bear market and pushing a gauge of commodity prices toward the lowest level since 2002. Declines subsequently moderated as the PBOC intervened via agent banks and signaled that the currency had fallen enough at a rare press briefing on Thursday.

Bear Case

“The PBOC sees 6.39-6.40 a dollar as an equilibrium level,” said Li Liuyang, a Shanghai-based strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. “If the yuan doesn’t diverge from that level, the PBOC doesn’t need to intervene. If it does, PBOC will step in.”

The freely traded offshore yuan advanced 0.3 percent to 6.4473 on Friday in Hong Kong, trimming its weekly drop to 3.6 percent. The Bloomberg JPMorgan Asia Dollar Index declined 0.2 percent, extending its retreat this week to 2.1 percent.

Yuan bears make a case for more declines by pointing to the currency’s real effective exchange rate, a measure adjusted for inflation and trade with other nations. It climbed about 14 percent over the last four quarters and was the highest among 32 major currencies tracked by Bank for International Settlements indexes.

The resilience of China’s overseas sales — the country’s share of global exports rose to a record 15 percent this year — suggests the benefits from a larger weakening aren’t big enough to offset the risk of capital outflows, according to Citigroup.

“There’s no obvious evidence that Chinese corporates and exporters are arguing for a weaker exchange rate,” said David Lubin, head of emerging-market economics at Citigroup in London. “The aim is not to start a currency war.”

Source: Bloomberg – China’s Yuan Rate Rises for First Time Since Devaluation

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