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Focus on China

China weakens yuan for third day, reassures markets

– ‘Complete nonsense’ –

China keeps a tight grip on the unit, allowing it to fluctuate up or down just two percent on either side of the reference rate, which it sets daily.

The PBoC on Tuesday announced a “one-time correction” of nearly two percent in the yuan’s value against the greenback as it changed the mechanism.

Previously, it based the fixing on a poll of market-makers, but declared it would now also take into account the previous day’s close, foreign exchange supply and demand and the rates of major currencies.

It has since lowered the central rate twice more, and the week’s combined drop is the biggest since China set up its modern foreign exchange system in 1994, when it devalued the yuan by 33 percent at a stroke.

Analysts viewed the move as a way for China to both boost exports by making its goods cheaper abroad and push economic reforms as it seeks to become one of the reserve currencies in the International Monetary Fund’s SDR (special drawing rights) group.

The volatility in the normally stable unit has raised concerns, and many analysts predict the yuan will continue to depreciate in the coming months, impacting global trade flows.

Bloomberg News reported Wednesday the central bank had intervened in the market to buy dollars and prop up the yuan, which PBoC Deputy Governor Yi Gang declined to confirm at Thursday’s briefing.

But he said the PBoC will exercise “effective management” in case of large fluctuations and dismissed rumours that officials had set a target for a 10 percent depreciation in the yuan to spur exports.

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“This is complete nonsense, completely without basis,” he said.

Speaking a day earlier, PBoC economist Ma Jun dismissed the possibility that China was seeking to wage a currency war, saying there was no need as exports were expected to pick up in the second half of the year.

“China does not have the need to start a currency war to gain advantage,” he was quoted as saying by the official Xinhua news agency.

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