China Moves to Devalue Yuan

China central bank unexpectedly decided to devalue the yuan on Tuesday, August 11 of 2015, allowing the currency to its lowest point in nearly three years.

The PBOC weakened the midpoint to 6.2298 per dollar today, compared with a 6.112 midpoint in the previous day, as the economy continues to falter.

China manages the exchange rate through an official midpoint or the daily fixing. In daily trading, the yuan is allowed to move 2 percent above or below that midpoint.

 Excerpt from the statement by PBOC:
For the purpose of enhancing the market-orientation and benchmark status of central parity, the PBC has decided to improve quotation of the central parity of RMB against US dollar. Effective from 11 August 2015,the quotes of central parity that market makers report to the CFETS daily before market opens should refer to the closing rate of the inter-bank foreign exchange market on the previous day, in conjunction with demand and supply condition in the foreign exchange market and exchange rate movement of the major currencies.
Excerpt from the PBOC spokesman:
We noticed that the central parity of RMB against US dollar of 11 August changed(in the depreciation direction) by nearly 2 percent compared to that of 10 August. The following two factors may be relevent. First, after the improvement of the quotation of the RMB central parity, the market makers may quote by reference to the closing rate of the previous day and, therefore, the accumulated gap between the central parity and the market rate received a one-time correction. Second, a series of macro economic and financial data released recently made the market expectation diverge. Market makers paid more attention to the changes of market demand and supply. Compared with the closing rate of 6.2097 Yuan per dollar in the previous day, today’s central parity depreciated by about 200 bps. The market still needs some time to adapt. The PBC will monitor the market condition closely, stabilizing the market expectation and ensuring the improvement of the formation mechanism of the RMB central parity in an orderly manner.
Next, the reform of RMB exchange rate formation mechanism will continued to be pushed forward with a market orientation. Market will play a bigger role in exchange rate determination to facilitate the balancing of international payments. Foreign exchange market development will be accelerated and foreign exchange products will be enriched. In addition, the PBC will push forward the opening-up of the foreign exchange market, extending FX trading hours, introducing qualified foreign institutions and promoting the formation of a single exchange rate in both on-shore and off-shore markets. Based on the developing condition of foreign exchange market and the macroeconomic and financial, the PBC will enhance the flexibility of RMB exchange rate in both directions and keep the exchange rate basically stable at an adaptive and equilibrium level, enabling the market rate to play its role environment, retiring from the routine FX intervention, and improving the managed floating exchange rate regime based on market demand and supply.

PBOC l Rida Husna l
8/11/2015 5:37:17 AM