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Investors fear currency war after China 8217 s third yuan devaluation

Article By: ,  Financial Analyst
August 13, 2015 2:36 PM

China has set the guiding rate for its currency lower for a third consecutive day, fuelling fears of a currency war.

The central bank put the yuan’s central parity rate at 6.4010 yuan for $1 today (August 13th), a 1.11 per cent drop from the previous day’s 6.3306.

The People's Bank of China (PBOC) said that the way it sets exchange rates would now become more market-oriented. It will now take into account the previous day’s close, foreign exchange supply and demand and the rates of major currencies.

The move sparked concerns over a currency war, with other countries feeling pressure to devalue.

The devaluation is the latest effort from the Chinese government to revive the country's economy and support trade after fresh data revealed exports fell by 8.3 per cent in July. A weaker yuan will make products cheaper abroad.

In a press conference in Beijing, the central bank tried to reassure markets, saying the country's strong economic environment, sustained trade surplus, sound fiscal position and deep foreign exchange reserves remain "strong support" for the exchange rate.

Analysts believe a further devaluation is possible

But analysts believe market forces could pull the currency even lower in the next days. China only allows the yuan to fluctuate up or down two per cent on either side of the reference rate.

Should the yuan trade in the lower end of this two per cent margin, the central bank is likely to lower its reference rate once again on Friday, according to the BBC.

However, PBOC economist Ma Jun told the Xinhua news agency that China could intervene to stabilise the yuan if needed. "The central bank, if necessary, is fully capable of stabilising the exchange rate through direct intervention in the foreign exchange market to avoid the herd mentality resulting in irrational movements of the rate," he said.

He also denied that China was seeking to wage a currency war, arguing it is not needed as exports are expected to pick up in the second half of the year.

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