The yuan will devalue further over the coming days, but not because China is igniting a currency war, said analysts. They believe the yuan is falling because China's central bank is allowing the currency to trade more freely.
"It is particularly telling that given the pace of fall in both the onshore and offshore yuan over the past few days, there has been no official comment from the PBOC (People's Bank of China)," said Mr Heng Koon How, senior currency strategist at Credit Suisse Private Banking Asia Pacific.
"We have to accept that the PBOC has stepped aside from active intervention of the yuan, to allow it to freely float. This is now the new normal for the yuan."
The yuan is a unique currency that fluctuates in a tight band in the onshore market but can be traded freely in the offshore market outside China. This has led to different prices for the currency, which could create arbitrage opportunities.
"The wild market movement appears to be out of the authorities' expectation, and we saw aggressive intervention in the offshore yuan market," said Commerzbank senior economist Zhou Hao. "However, we don't really understand the rationale behind the market movements in the past few days."
The authorities might have intervened to cap the rapid slide of the offshore yuan as they believe "speculative forces" were causing "abnormal fluctuations" and sending "misleading price signals", said a statement by PBOC's China Foreign Exchange Trade System yesterday.
It also said "there was no basis for the yuan's continuous depreciation and that it was stable against a basket of currencies in 2015".
PBOC could be considering new tools to contain speculative and fake trades, especially by foreign companies, reported Bloomberg.
"Intervention in this context is not incongruous to the PBOC's goal of a flexible currency regime," HSBC analysts Wang Ju and Joey Chew wrote in a note yesterday.
Market watchers expect the yuan to continue depreciating as it is overvalued compared with its long-term effective exchange rate and against a basket of currencies.
"The real effective exchange rate of the yuan was estimated to be 10 to 15 per cent overvalued in mid-2015. This has clearly affected Chinese export competitiveness," said IG market analyst Bernard Aw.
"The August devaluation saw the onshore yuan weakened by around 6.2 per cent. This means there could be another 3.8 to 8.8 per cent of weakening to go before the currency reaches a neutral value."
Mr Aw noted Beijing's primary concern is the persistent fall in prices, which is mostly driven by the global slump in commodity prices.
This article was first published on January 8, 2016.
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