China central bank intervenes to prevent yuan from falling too far

The People's Bank of China.
The People's Bank of China.PHOTO: AFP

BEIJING (BLOOMBERG) - The yuan sank for a second day on Wednesday (Aug 12), spurring the central bank to intervene as the biggest two-day rout since 1994 tests the government's resolve to give market forces more sway in determining the exchange rate.

The currency weakened 1.8 per cent to a four-year low of 6.4392 per dollar in Shanghai, after a 1.8 per cent tumble on Tuesday that marked its steepest slide in two decades. While the People's Bank of China followed through on a pledge to align its fixing more closely with the previous day's closing level, people familiar with the matter said it intervened to prevent the currency from dropping too much.

China's surprise change to its currency regime on Tuesday rippled through global markets as investors speculated the move was timed to combat a deepen ing slowdown in the world's second- largest economy. The yuan's tumble roiled Asian currencies and equities again today, even after policy makers said there's no economic basis for a continuous fall.

The yuan is facing "a vicious cycle of depreciation," said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole. "At some point they'll either abandon the implementation of the new fixing mechanism and stabilize the fixing, or they'll intervene heavily.

Agent banks sold the US dollar around the 6.43 level on behalf of the PBOC, said one person familiar with the matter. The central bank didn't immediately reply to a fax seeking comment.

The PBOC said earlier that current fluctuations in the exchange rate are "normal" and its daily fixings will "gradually move towards stability," highlighting the nation's trade surplus and US$3.65 trillion (S$5.15 trillion) of foreign-exchange reserves. It reiterated that the currency will be kept basically stable, having on Tuesday pledged to ensure the new reference-rate mechanism took effect "in an orderly manner."

The devaluation suggests policy makers are now placing a greater emphasis on supporting exports. In recent months, they had propped up the yuan to deter capital outflows, protect foreign-currency borrowers and encourage greater global usage.