Yuan Tumbles Versus Dollar

After allowing the yuan to drop sharply earlier this week, the Chinese government intervened Wednesday to boost the currency amid a backdrop of international monetary fears. Still, the yuan continued to slip Thursday, as China set the guiding rate for its currency lower for a third straight day. The initial government-driven devaluation move – which shocked markets – was made in an attempt to make the country’s exports more attractive to foreign buyers and help prop up a struggling economy.

Late yesterday, the country’s central bankers told state-owned banks to sell dollars on its behalf in the last 15 minutes of trading, according to published reports. The end result brought the currency’s value to 6.45 yuan against the dollar. Global markets, including those in the U.S. and Europe, nosedived after Monday’s and Tuesday’s devaluation. Immediately after, analysts questioned China’s commitment to allowing the market to dictate its currency.

“With all the efforts to make the economy more market-oriented, the government is introducing more risks into its financial system, but whenever it starts to intervene again, it puts credibility on the line,” Zhu Chaoping told the Wall Street Journal. Chaoping is the China economist at UOB Kay Hian Holdings Ltd., a Singapore-based investment bank.

The International Monetary Fund (IMF) and other entities have been calling for the Chinese government to loosen its tight control on exchange rates. The IMF on Tuesday lauded the country for allowing a near 2% depreciation in the yuan that day, while noting that China still had more work to do in letting its currency flow with the market. Early Wednesday, China’s central bank called the yuan’s greater volatility a “normal phenomenon.” When that message failed to convince investors of the currency’s stability, the People’s Bank of China changed tactics and pushed the sale of dollars. Nonetheless, the yuan is down roughly 3% against the dollar since it began its slide.

Some analysts expect China will continue direct market interventions if the yuan continues to fall. “It could be a never-ending spiral otherwise,” Cynthia Wong of Société Générale SA told the Wall Street Journal.