China central bank calls reports of a possible 10% drop in yuan 'groundless'

BEIJING (REUTERS)- China's central bank called reports of a possible yuan drop of 10 per cent "groundless" as it maintained that there is no basis for continued currency depreciation

At a closely-watched press conference in Beijing on Thursday, Poeple's Bank of China (PBOC) vice governor Yi Gang said the country will quicken the opening of its foreign exchange market and will attract more foreign investors as it liberalises its financial markets.

In a historic move for Beijing, officials devalued the currency by about 2 per cent 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. The yuan fixing rate dropped 1.1 per cent to 6.401 per US dollar, after slides of 1.6 per cent and 1.9 per cent in the past two days.

"A rigid yuan exchange rate is not suitable for China," Mr Yi said in comments at a question and answer session following the distribution of an official statement. Foreign media outlets other than newswires were not permitted to attend the conference.

Mr Yi 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 reserves, a trade surplus and a sound fiscal position were some factors cited to support a stable currency.

Sources told Reuters earlier on Thursday that "powerful voices within government were pushing for the yuan to go still lower, suggesting pressure for an overall devaluation of almost 10 per cent."

But Mr Yi dismissed such speculation as groundless, 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 per cent.

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

Thursday'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. Mr Yi 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 sell US dollars on its behalf 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 forex smarkets.