China Signals Tougher Yuan Management at Expense of Market Role

(Bloomberg) -- China signaled tougher management of the yuan, dropping a phrase underlining the importance of market forces from a key policy report for the first time in five years.

The People’s Bank of China cut its pledge to allow "market supply and demand to play a bigger role in deciding the exchange rate" from a section on future tasks in its third-quarter monetary report. The last time that phrase wasn’t used was in the fall of 2013. Policy makers will take steps to ensure the yuan is basically stable at reasonable and balanced levels, according to the report published late Friday.

China Signals Tougher Yuan Management at Expense of Market Role

The change of phrasing comes as the yuan once again edges closer to its weakest level in more than a decade. The currency tumbled 9 percent over the past six months, prompting questions over whether the PBOC would intervene before it hit the psychological milestone of 7 per dollar -- a level that hasn’t been reached since the global financial crisis.

"The PBOC is no longer comfortable with the yuan’s rapid depreciation and may think there’s been overshooting of the exchange rate," said Xia Le, Hong Kong-based chief Asia economist at Banco Bilbao Vizcaya Argentaria SA. "The central bank may take more measures to stabilize the yuan rather than encourage more flexibility. The currency won’t breach 7 any time soon."

Still, the central bank reiterated in the report that the market will play a "fundamental" role in its foreign-exchange system. The nation will also deepen currency market reforms and make the yuan more flexible in both directions, it said.

The onshore yuan weakened 0.16 percent to 6.9669 per dollar as of 5:40 p.m. in Shanghai as the greenback rallied. China’s currency touched its weakest level since May 2008 late last month.

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