BEIJING, Aug. 12 (Xinhua) -- Chinese currency continued to fall on Wednesday after the central bank reformed the exchange rate formation system to better reflect the market.
The central parity rate of renminbi, or yuan, weakened by 1,008 basis points, or 1.6 percent, to 6.3306 against the U.S. dollar, narrowing from Tuesday's 2 percent, according to the China Foreign Exchange Trading System.
The People's Bank of China (PBOC), the central bank, changed the exchange rate formation system so that it takes into consideration the closing rate of the inter-bank foreign exchange market on the previous day, supply and demand in the market and price movement of major currencies.
The International Monetary Fund (IMF) described the central bank's move as "a welcome step" that allows market forces to have a greater role in determining the exchange rate.
"Greater exchange rate flexibility is important for China as it strives to give market-forces a decisive role in the economy and is rapidly integrating into global financial markets," an IMF spokesperson said in an email on Wednesday.
The IMF said it believes the country can achieve an effective floating exchange rate system within two or three years.
However, the move still surprised the market and prompted the lowest valuation of the yuan since October 2012.
Ma Jun, chief economist at the PBOC's research bureau, attributed the lower rate to a long-standing gap between the central parity rate and the previous day's closing rate on the inter-bank market.
In a latest statement released on Wednesday, the PBOC said the rate changes are normal, as it shows a more market-based system and the decisive role that the supply-demand relationship plays in determining the exchange rate.
"This may lead to potentially significant fluctuations in the short run but after a short period of adaptation the intra-day exchange rate movements and resulting central parity fluctuations will converge to a reasonably stable zone," the PBOC said.
Ma also said the shift is a one-off technical correction and should not be interpreted as an indicator of future depreciation.
A relatively robust economy, current account surplus and the internationalization of the yuan will help the currency remain stable, the PBOC said.
Official data showed the Chinese economy maintained 7 percent growth in the first half of 2015 against challenges at home and abroad, creating sound conditions for the yuan to hold steady.
Surplus in goods trade reached 305.2 billion U.S. dollars in the first 7 months, a fundamental prop for the exchange rate.
An internationalized yuan and open financial sector have boosted the demand for the currency in recent years, which serves as momentum for the rate's stabilization, the PBOC said.
In addition, the PBOC also cited China's abundant foreign exchange reserves, stable fiscal condition and healthy financial system. The central parity rate is based on a weighted average of prices offered by market makers before the opening of the interbank market each trading day. The currency is allowed to trade on the spot market within 2 percent of the rate.
The PBOC said it will strive to further improve market-based exchange rate formation, maintain normal fluctuations and keep the rate basically stable at an adaptive and equilibrium level.
Yuan weakening is not devaluation: central bank economist
Photo taken on March 16, 2014, shows yuan (central) and other currencies in the picture. [Photo/IC]
BEIJING, Aug. 11 (Xinhua) -- Allowing the Chinese yuan to weaken sharply against the U.S. dollar does not signify the beginning of a downward trend, a central bank economist said on Tuesday .
The yuan central parity rate announced by the China Foreign Exchange Trading System (CFETS) stood at 6.2298 against the greenback on Tuesday compared to 6.1162 on Monday, down nearly 2 percent, the lowest level since April, 2013.
The shift is a one-off technical correction and should not be interpreted as an indicator of future depreciation, said Ma Jun, chief economist at the research bureau of the People's Bank of China (PBOC).
The central parity rate is based on a weighted average of prices offered by market makers before the opening of the interbank market each trading day. The currency is allowed to trade on the spot market within 2 percent of the rate.
The PBOC said Tuesday's lower rate resolved accumulated differences between the central parity rate and the market rate, and was part of improvements to the central parity rate formation system to make it more market-based.
Ma said a long-standing gap between the central parity rate and the previous day's closing rate on the inter-bank market led to the lower rate on Tuesday.
He said China's economic fundamentals support a "basically stable" yuan exchange rate. A central parity rate closer to the market rate will provide a more stable environment for macro-economic development.
The economy has shown signs steadying and recovery, with infrastructure investment accelerating and property sales improving. Compared with some economies under strong pressure to depreciate their currencies, China is better-off, with a current account surplus, huge foreign exchange reserves, low inflation and sound fiscal conditions, he explained.
From Tuesday, daily central parity quotes reported to CFETS before the market opens will be based on the previous day's closing rate on the inter-bank market, supply and demand and price movements of other major currencies, according to the PBOC.
In July 2005, the central bank unpegged the yuan against the U.S. dollar, allowing it to fluctuate against a basket of currencies.
Making formation of the central parity rate more market-based touches on the core of reform, compared with previous steps that mainly concerned how much the yuan can fluctuate, said Guan Tao, former head of the international payments department at the State Administration of Foreign Exchange.
The yuan was at first allowed to vary by 0.3 percent from the central parity rate each trading day and the trading band gradually expanded to 2 percent in March last year. The market expects it to expand to 3 percent in the near future.
The latest reform actually increases China's flexibility and independence in foreign exchange control, as a rigid exchange rate system is open to speculative attacks, Guan told China Business News.
Two-way fluctuations will become normal for the yuan in future, he said.