Most Asian bourses rebounded and some currencies recovered yesterday, even as China devalued its currency for a third straight day.
This after Beijing sought to restore some confidence by easing concerns over a disorderly devaluation of the yuan.
The People's Bank of China (PBOC) said it supports a strong, stable yuan in the long term after its sharp devaluations this week roiled global markets and currencies. Its assurances come even as volatility heightened with its more market-based approach to fixing.
The PBOC reduced the level around which the yuan can trade by 1.1 per cent to 6.401 per US dollar yesterday, taking its three-day devaluation to 4.7 per cent. The yuan fell to 6.3997 against the greenback.
The Singapore dollar recovered to 1.3991 after its biggest two-day loss since 2011. The ringgit remained flat yesterday at about 4.0105 against the greenback.
Except for Thailand, which fell 0.3 per cent, Asian bourses rebounded. Singapore gained nearly 1 per cent; Japan rose nearly 1 per cent; Hong Kong was up 0.4 per cent; Shanghai climbed 1.8 per cent and Shenzhen surged 2.2 per cent. Malaysia rose 0.7 per cent and Jakarta added 2.3 per cent.
Credit Suisse, in a report yesterday, said the main motivation for adjusting the yuan is "political rather than economical, although the move should be supportive of Chinese growth and help reduce deflationary pressures at the margin".
"The main goal is, in our view, to promote the inclusion of the yuan in the Special Drawing Rights (SDR) basket," it said.
By the end of the year, the International Monetary Fund will review whether the yuan should be included in the SDR basket, which would basically mean including the yuan alongside the greenback, the euro, the British pound and the Japanese yen as a formal reserve currency.
China hopes that by giving the market a bigger role in determining the value of the yuan, it could move closer to its goal of making the yuan a more international currency.
While some analysts see China's moves as a step towards creating a freely floating currency, the transition to such a framework is likely to take some more time and could be volatile. And until China posts strong and convincing growth numbers, it will likely remain a big worry for investors.
Mr Andrew Colquhoun, Fitch (Hong Kong)'s senior director, sovereigns, said China's moves are aimed at "tackling unresolved structural weaknesses".
"Allowing markets freer play at this juncture entails risks, but the authorities' calculation seems to be that the risks of doing nothing are greater," he added.
But a more substantial devaluation of the yuan could add to the economic challenges currently faced by the Asia-Pacific more broadly, Credit Suisse said.
The competitiveness of Asia's export-oriented sectors is under pressure and likely to remain so in the next several quarters," it warned.
The most affected countries in the region, if a sustained depreciation of the yuan were to occur, would be the Philippines, Malaysia, Singapore and Thailand.
Malaysia is vulnerable as much of its commodity exports go to China, while Thailand's exports compete with China's.