SHANGHAI – China’s central bank Monday fixed the daily reference rate of the yuan at 6.5784, its lowest daily rate against the dollar since February of 2011.
This rate represents a 0.45 percent drop on the People’s Bank of China’s daily reference rate from Friday, after a week of yuan instability — Wednesday saw a previous five-year low in the daily fixed rate.
The recent fluctuation in the yuan’s fixed daily reference rate is generally seen to be a response to Federal Reserve Chairwoman Janet Yellen’s recent comments leaning towards an interest rate rise in the coming months.
In spite of the weakening in the central bank’s official fixed rate, onshore currency traders saw the yuan strengthen slightly, up 0.04 percent to 6.5633 against the dollar.
The yuan has experienced continued instability over the past year with bouts of depreciation.
“The People’s Bank of China seeks to open the currency to more market forces, while balancing the effects of a strengthening dollar and a slowing Chinese economy. There has been downward pressure on the yuan over the past year due to rising debt levels and the desire to increase export competitiveness through a weaker yuan,” said Chris Powers, manager at Z-Ben Advisers.
Some China watchers believe the rate adjustment was an intentional move by Chinese policy makers to remain in control of the economy.
“I think they are probably anchoring the yuan lower so that when the U.S. Federal Reserve changes interest rates later in the year, there won’t be too much further pressure to devalue the yuan. I think this is a case of getting ahead of things as if they intentionally push the currency lower, it will be easier than if there is external pressure and people start getting nervous about the economy,” said Benjamin Cavender, principal at China Market Research Group.
Looking to the near future, Powers believes that we are not going to see much movement on Monday’s low rate.
“The People’s Bank of China has indicated that they do not intend to engage in currency wars, so we’ll likely only see incremental moves in the yuan going forward. It should provide modest relief to exporters but likely not enough to counter the effects of the recent economic slowdown for large, state-owned enterprises,” he said.
Lu Ming, professor of economics at Shanghai Jiao Tong University, also attributed the currency move to the fact that “China’s economy is slowing down, and inflation is rising.”
Ultimately, it appears that China will be playing a waiting game until the Federal Reserve interest rate plans become clear, and Monday’s rate fix, as well as the recent instability, are symptoms of the uncertainty, some observers said.
“I think [the daily reference rate] is probably more related to guessing about what the Fed is going to do than anything else, and I’d be surprised if we see a significantly higher yuan rate in the next couple of months,” said Cavender.