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The Yuan Drops For A Third Day In A Row

China has set the guiding rate for its yuan currency lower for a third consecutive day.

But Thursday’s rate of 1% down against the dollar was a smaller margin than the shock cuts earlier in the week.

The bank had on Tuesday announced it would start setting the daily rate based partly on the previous day’s trading, bringing the yuan closer to a free-floating currency.

The move triggered concerns over a currency war to boost China’s exports.

Recent economic data had seen a decline in Chinese exports, adding to the worries that the world’s second largest economy was headed for a prolonged slowdown. A weaker yuan will make products cheaper abroad, meaning Chinese companies are more competitive on international markets.

China’s Falling Yuan

The Thursday midpoint rate set by the People’s Bank of China (PBOC) – the central bank – was 6.4010 yuan for $1, a 1.1% rise from the previous day’s 6.3306.
The midpoint is a guiding rate, from which trade can rise or fall 2% during the day.

The national lender again tried to calm concerns over the direction of the yuan, repeating Wednesday’s assertion that there was no basis for further depreciation given strong economic fundamentals. It said the country’s strong economic environment, sustained trade surplus, sound fiscal position and deep foreign exchange reserves provided “strong support” to the exchange rate.

But in light of the weak economic data and Tuesday’s policy change to set the daily midpoint based on the previous day’s trading, market forces could well pull the currency even lower in the next days.

Should the yuan trade in the lower end of its 2% margin below the midpoint, the central bank is likely to lower its reference rate once again on Friday.