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 As the yuan slid for a third straight day, the People's Bank of
China (PBOC) said the strong economic environment, sustained trade
surplus, sound fiscal position and deep foreign exchange reserves
provided "strong support" to the exchange rate <CNY=CFXS>.
China's decision to devalue the currency on Tuesday by pushing its
official guidance rate down 2 percent sparked fears of a "currency
war" and roiled global financial markets, dragging other Asian
currencies to multi-year lows.
It also drew accusations from U.S. politicians that Beijing was
unfairly supporting its exporters.
The PBOC said at the time that the move was a one-off depreciation,
but sources involved in the Chinese policy-making process told
Reuters that some powerful voices within government were pushing for
the yuan to go still lower, suggesting pressure for an overall
devaluation of almost 10 percent.
PBOC Vice-governor Yi Gang said it was nonsense to believe that
government expected the yuan to fall that far.
 Earlier on Thursday, the PBOC said there was no basis for continued
depreciation of the yuan.
However, even if the central bank succeeds in putting a floor under
the yuan for now, poor July economic data and expectations of more
interest rate cuts later in the year are likely to fuel expectations
that authorities could let it weaken further.
REFORMS AT RISK?
Fitch ratings agency said on Thursday that the depreciation in the
yuan "highlights wider pressures on the economy", but also
demonstrated that authorities remained committed to market-oriented
reform, a commitment many had questioned after Beijing's
heavy-handed interventions to stem a plunge in its stock markets in
June.
Vice-governor Yi said China would quicken the opening of its foreign
exchange market and would attract more foreign investors as it
liberalizes its financial markets.
Officials said the PBOC had stopped "regularly" intervening in the
foreign exchange market but allowed that it could conduct "effective
management" of the yuan in cases of extreme volatility.
Traders said the central bank appeared to have been caught off guard
by the intensity of selling that was sparked off by its surprise
move on Tuesday, and believe it ordered big state banks to support
the currency late on Wednesday, which influenced the PBOC's official
guidance rate for the following day.
State banks were also believed to be buying yuan and selling dollars
on Thursday.
Though the yuan <CNY=CFXS> opened slightly weaker on Thursday, the
spot rate was only about 0.1 percent below the guidance rate
<CNY=SAEC>, the closest it has been since November, as the central
bank tried to slow the sharp sell-off that has knocked around 3.2
percent off the currency since Monday's close. [CNY/]
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The spot rate is currently allowed to trade within a range of 2
percent above or below the official fixing on any given day, and had
been consistently trading over 1 percent weaker than the midpoint
since March.
ECONOMY LOSING STEAM
Tuesday's yuan devaluation followed a run of weak economic data and
resulted in the biggest one-day fall since 1994, raising market
suspicions that China was embarking on a longer-term depreciation of
its exchange rate that would make Chinese exports cheaper.
Data on Chinese factory activity growth and retail sales on
Wednesday underlined sluggish growth in the world's second-largest
economy, while fiscal expenditures jumped 24.1 percent in July,
reflecting Beijing's efforts to stimulate economic activity.
Weighed down by weak exports, sluggish domestic demand and a cooling
property market, growth in the world's second-largest economy is
expected to slow from 7.4 percent in 2014 to 7 percent this year,
its slowest pace in a quarter of a century.
China's Ministry of Commerce, which sources said led the pressure
within government for yuan depreciation, said it expected exports to
see growth for the full year and was studying new measures to
support trade.
Some Chinese steel producers have already cut export prices in
response to the lower yuan, industry sources said, but analysts said
the currency's drop so far has been too mild to boost shipments much
given sluggish global demand.
The PBOC also said on Thursday that it would monitor "abnormal"
cross-border flows after the devaluation raised fears that investors
would seek to pull capital out of China in anticipation of further
falls in the currency.
(Writing by Will Waterman; Editing by Kim Coghill)
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