Yuan declines after China central bank cuts interest rates

China's yuan declined to a two-week low after the central bank lowered borrowing costs in a surprise move.
China's yuan declined to a two-week low after the central bank lowered borrowing costs in a surprise move. PHOTO: AFP

BEIJING (BLOOMBERG) - China's yuan declined to a two-week low after the central bank lowered borrowing costs in a surprise move.

The monetary easing comes amid efforts to arrest a stock rout and follows central bank cash injections that failed to curb money-market rates. Liquidity has tightened as the central bank buys yuan to stabilize the exchange rate following the currency's shock devaluation two weeks ago.

The yuan fell as much as 0.26 per cent to 6.4293 a US dollar before trading down 0.18 per cent at 6.4240 as of 10:26 am in Shanghai, according to China Foreign-Exchange Trade System prices.

"There's pressure on the renminbi to depreciate," said Khoon Goh, a senior foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. in Singapore. "China is still intervening to stem the extent of the yuan depreciation. They are trying to boost the economy with the interest-rate and reserve-ratio cuts, but I think it's probably not sufficient. The currency also has to make more adjustments."

The People's Bank of China reduced its one-year lending and deposit rates by 25 basis points each to 4.6 per cent and 1.75 per cent, respectively. The reserve-requirement ratio was trimmed by 50 basis points for all lenders, effective Sept. 6.

"The double cut confirms that, between stable currency and independent monetary policy, China chooses the latter," Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp., wrote in a note. "We see a good chance that the yuan may weaken further in both onshore and offshore markets as a knee-jerk reaction to China's jumbo easing."

China devalued the yuan on Aug. 11 and shifted to a more market-oriented exchange rate, triggering the currency's steepest slide in two decades. Under the new system, PBOC intervention has partly replaced the daily reference rate's role in guiding currency moves. That came after authorities kept the yuan in a narrow band of around 6.2 a US dollar since March amid a push for inclusion in the International Monetary Fund's basket of reserve currencies.

Central bank intervention to defend the yuan probably drained 600 billion yuan (S$131 billion) from the banking system from June to August, according to Macquarie Securities Ltd.

China's stocks swung between gains and losses on Wednesday as traders weighed the impact of the rate cuts. The Shanghai Composite Index of stocks tumbled 7.6 per cent on Tuesday to chalk up the steepest four-day rout since 1996. The reserve- ratio cut will release 750 billion yuan into the financial system, according to an estimate by Barclays Plc.

The PBOC cut its reference rate to a four-year low of 6.4043 after a gauge of dollar strength rose the most since July overnight. The offshore yuan traded freely in Hong Kong lost 0.16 per cent to 6.4984.

There is no basis for yuan devaluation to persist and the nation can maintain the exchange rate at a reasonable and equilibrium level, Premier Li Keqiang said during a meeting with Kazakhstan First Deputy Prime Minister Bakytzhan Sagintayev, according to a statement posted on the State Council website on Tuesday.