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China lifts currency most in a decade

Explainer: How and why China devalues its currency

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by Angus Grigg
China strengthened its currency by the most in more than a decade on Friday morning, in a further blow to hedge funds betting against a falling yuan and sharp decline in the world's second biggest economy.
The People's Bank of China, the central bank, set the daily fixing rate at 6.4589 against the US dollar, up 365 basis points from Thursday's rate. It was the biggest upward move since 2005 and contrary to market sentiment which had been expecting the yuan to weaken.
"I am always sceptical about reading too much into the daily fixing rate," said Julian Evans-Pritchard from Capital Economics in Singapore via phone.
"But it does show that those expecting a big devaluation in the yuan were wrong."
"It shows the central bank does not want to intervene heavily in the market." Bloomberg
Mr Evans-Pritchard said Beijing's move was mainly due to the yen strengthening, after the Bank of Japan maintained its monetary policy stance on Thursday.
This has translated into weakness in the US dollar and therefore a relatively stronger yuan.
Liu Jian, an economist at the Bank of Communication in Shanghai, said the fixing was stronger than the market had expected. He said the PBOC was under pressure to allow the yuan to strengthen, given the weakness in the US dollar.
"It shows the central bank does not want to intervene heavily, rather they want to let the market increasingly set the yuan's level," he said.

Mr Liu said future movements in the yuan would be larger and more frequent, as the central bank allowed the market to play a bigger role in setting the currency.
In August last year China surprised markets with a one-off devaluation of the yuan, after changing the way it set the exchange rate.
It was the biggest one-off devaluation in 20 years and had many betting on further weakness in the Chinese currency.
The most prominent of these so called "China bears" was US hedge fund manager Kyle Bass, the founder of Hayman Capital.
In a letter to shareholders in February, Mr Bass said China's banking system faced losses four times larger than those incurred by the US during the 2008 global financial crisis.
"China will likely have to print in excess of $US10 trillion worth of yuan to recapitalise its banking system," he wrote.
"By the time the loss cycle has peaked, we believe the renminbi [yuan] will have depreciated in excess of 30 per cent versus the US dollar."
Mr Bass is not alone in his view on China's debt problems, but an imminent and substantial depreciation of the currency now appears unlikely.
This is partly a function of Beijing's efforts to revive growth through a fresh round of credit stimulus this year.
While many worry this will exacerbate China's debt problems in the medium term, it is expected to keep economic growth above 6.5 per cent this year and maintain the relatively strong yuan.
The International Monetary Fund was the latest to sound a warning about China's debt levels this week.
It said China's corporate debt was now 160 per cent of gross domestic product and still rising.
The IMF estimated 15.5 per cent of loans made by commercial banks to companies, or $US1.3 trillion ($1.7 billion), were "at risk". This compares with about $US1.7 trillion which the banks are holding as Tier 1 capital and $US356 billion in reserves.