Global stock markets have clawed back losses as China’s central bank made a rare public bid to quell fears over a disorderly devaluation of its currency.
The world’s second-biggest economy stunned financial markets on Tuesday by lowering the value of the yuan by 1.9 per cent – the biggest one-day shift in two decades – and following up with a cut of a similar scale the next day.
The move – prompted by Beijing’s concerns about an economic slowdown and an overvalued yuan making China’s exporters less competitive – wiped almost £1trn off shares worldwide in two days, amid worries over a fresh escalation of global currency wars.
But the People’s Bank of China took the unusual step of attempting to put a floor under the currency’s decline at a press conference. Rumours that Beijing was seeking a 10 per cent devaluation of the yuan were described as “sheer nonsense” and “totally unfounded” by deputy governor Yi Gang.
Assistant governor Zhang Xiaohui said there was “no basis for persistent and substantial devaluation”.
Chinese banks were also rumoured to be supporting the yuan by buying up the currency and selling dollars. The yuan still fell for a third day running but the decline was far smaller at just 0.2 per cent. The Eurostoxx benchmark of Europe’s 50 biggest stocks rose 0.9 per cent, with most big exchanges up. Bond prices fell back as investors moved cash back into riskier assets.
China has painted the sudden devaluation as a move designed to give market forces more influence in setting the level of the yuan, increasing the likelihood that the International Monetary Fund will include it in its basket of reserve currencies.
But Beijing has also slashed interest rates four times since last November in a bid to steady a weakening economy, as well as intervening to prevent a stock market collapse. Analysts suggest that further cuts in the yuan are likely if growth shows no sign of recovering its previous pace.
“We expect the currency to continue to depreciate over the next few days, given downward pressures... suggesting that the Chinese economy is slowing again,” said Susan Joho, an economist at the private bank Julius Baer.
Some Chinese steel producers have already reduced export prices in response to the lower yuan. The central bank also said it would monitor “abnormal” cross-border flows after the devaluation raised fears that investors would seek to pull capital out of China in anticipation of further falls in the currency.
Some analysts said China’s currency moves could result in the Federal Reserve pushing back the date of its first interest rate rise, which many had expected next month.
“Our modelling work suggests Fed tightening would be delayed and slower, with US 10-year yields dropping back below 2 per cent in 2016-17,” said Marcos Casarin from the forecasting firm Oxford Economics.