BEIJING: China’s yuan started lower Friday, after the European Central Bank revealed a violent economic easing program to enhance its slow economy.
The People’s Bank of China weakened the yuan’s daily reference rate against the U.S. dollar by the most since March last year, when it widened the currency’s trading band.
China too has been pushing through stimulus measures in recent months as growth splutters, cutting interest rates for the first time in over two years in November 2014. In December last year, the central bank allowed banks additional room to lend, to drive inflation and growth.
A weaker currency helps boost exports and nudge inflation higher, which is at a five-year low. Earlier this week, China posted its slowest growth in decades for 2014.
The central bank’s weaker guidance for the currency comes as central banks across the world push their currencies lower through aggressive monetary easing policies in a bid to kick-start growth and revitalize flagging economies. The U.S. economy though is showing signs of recovery, which has sent U.S. dollar rallying, pushing currencies across the board, down further. And, the U.S. Fed is expected to raise interest rates this year.
In recent months, balance of payments data show large capital outflows from China, which analysts from Goldman Sachs said is most likely linked to the change in “FX regime” last year. That has also put pressure on the currency. They expect outflows to decrease this year, allowing the currency to remain “fairly stable” against the U.S. dollar.
In an effort to make the currency more market-driven, last year the central bank widened the band within which the currency is allowed to trade, allowing more volatility. And, analysts say the central bank has been less active in managing daily currency trading.
The reference rate, set by the central bank, is the daily peg for trading of the yuan against the U.S. dollar. Setting the so-called central parity rate weaker as the currency falls prevents the yuan from hitting the 2% daily trading band above or below this rate.
The currency’s volatility relative to other Asian currency still remains subdued.
“We believe that increased currency flexibility will remain and even increase in the future, however it does not mean that [the Chinese yuan] will suddenly become more volatile than other Asian currencies,” said Sacha Tihanyi, senior currency strategist at Scotiabank in Hong Kong.
The yuan fell as low as 6.2237 against the U.S. dollar Friday, after being fixed at 6.1342.
