Chinese yuan gains value against US dollar

People's Bank of China halts three day currency devaluation, allowing Chinese yuan to gain value against US dollar

Photo by: Reuters
Photo by: Reuters

China's central bank on Friday raised the value of the yuan against the US dollar by 0.05 percent, the national foreign exchange market said, ending three days of falls after a surprise devaluation.

The daily reference rate was set at 6.3975 yuan to $1.0, from 6.4010 the previous day, the China Foreign Exchange Trade System said. That was also slightly stronger than Thursday's close of 6.3982 yuan.

The higher fixing for the yuan came after the People's Bank of China (PBoC) reassured financial markets by pledging to seek a stable currency after a shock devaluation of nearly two percent on Tuesday.

The cut, and two subsequent reductions, sent global financial markets into a tailspin as it raised questions over the health of the world's second-largest economy and sparked fears of a possible currency war.

Beijing said the move was the result of switching to a more market-oriented method of calculating the daily reference rate which sets the value of the yuan, also known as the renminbi (RMB).

Previously, authorities based the rate on a poll of market-makers, but will now also take into account the previous day's close, foreign exchange supply and demand and the rates of major currencies.

The yuan is still only allowed to fluctuate up or down two percent on either side of the reference rate.

"Currently, there is no basis for the renminbi exchange rate to continue to depreciate," PBoC assistant governor Zhang Xiaohui said Thursday.

"The central bank has the ability to keep the renminbi basically stable at a reasonable and balanced level," she said.

Speaking earlier this week, another PBoC official said the central bank could directly intervene in the market, after reports it bought yuan on Wednesday to prop up the unit.

"The central bank, if necessary, is fully capable of stabilising the exchange rate through direct intervention in the foreign exchange market," PBoC economist Ma Jun said.

China keeps a tight grip on its currency due to worries that sudden fund outflows or inflows could cause more financial risk and challenge its control, but it has also pledged to move towards more flexibility.

Beijing is pushing for the yuan to become one of the reserve currencies in the International Monetary Fund's SDR (special drawing rights) group.