Central bank says there is ‘no basis’ for continuous depreciation

The People's Bank of China (PBC), the country's central bank, on Thursday sought to ease concerns over the recent yuan devaluation against the dollar, which analysts said has contributed to the volatility in the Chinese stock market lately.

The PBC said in a statement issued Thursday that the yuan has been "basically stable" in 2015 against a basket of currencies selected for a new exchange rate index and is still among the "strengthening" international reserve currencies. It also said there is "no basis" for continuous depreciation.

The China Foreign Exchange Trade System (CFETS), which operates under the PBC, announced in December that it would shift the method of tracking the value of the yuan to a new trade-weighted index that compares the yuan to a basket of currencies rather than just the US dollar.

The CFETS yuan exchange rate index was at 100.94 on December 31, up 0.94 percent from a year earlier. Also, the CFETS yuan exchange rate index against a Bank for International Settlements basket of currencies increased 1.71 percent year-on-year on December 31, while the index against the IMF's Special Drawing Rights currency basket dropped by 1.16 percent year-on-year at the end of 2015, according to the PBC statement.

However, the yuan has fallen in value against the dollar, which is still more closely watched by investors.

The PBC set the midpoint rate for yuan trading on Thursday at 6.5646 per dollar, which Reuters said was the lowest since March 2011 and the biggest daily drop since last August. Onshore yuan trading closed at 6.5939 per dollar Thursday, depreciating by 364 basis points from the day before.

Analysts said the general downward trend of the yuan exchange rate in the last couple of weeks had contributed to the volatility in the mainland stock market.

Trading was suspended for the second time this week on Thursday after the CSI 300 Index, which tracks the 300 largest companies listed in the Shanghai and Shenzhen stock exchanges, plummeted 7 percent, triggering the newly implemented circuit breaker system.

"The depreciation of the yuan has weakened investors' confidence," Tian Yun, director of the research center of the China Society of Macroeconomics, told the Global Times on Thursday. The weakening of the yuan reflects the downward pressure in the country's economy, Tian noted.

In addition to the economic slowdown in China, outside factors have also affected the yuan exchange rate, said Xie Shuiqing, a professor with the Finance & Economics College at Chongqing Jiaotong University.

After the US Federal Reserve raised its benchmark interest rates in December, many foreign firms started withdrawing capital from China, which is another key reason for the yuan's depreciation against the dollar, Xie told the Global Times on Thursday.

Though the yuan may continue to weaken, the depreciation won't be significant, Xie noted.

The PBC said in Thursday's statement that the "conditions" are right for the yuan to maintain basic stability going forward. For example, the economy is stable, inbound and outbound direct investment are still growing, the country's foreign reserves are sufficent, and overseas demand for yuan-denominated assets will gradually increase, the PBC noted.