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Thursday, August 13, 2015, 18:19

China stocks close higher as yuan concerns allayed

By Agencies

China stocks close higher as yuan concerns allayed

BEIJING - Chinese shares closed higher on Thursday as fears of further currency depreciation subsided following the central bank's reassurance that the yuan's value has "returned to market levels" after days of sharp correction.

The benchmark Shanghai Composite Index climbed 1.76 percent to close at 3,954.56 points and the Shenzhen Component Index gained 2.1 percent to close at 13,395.18.

Total turnover of the two bourses shrank to 1.08 trillion yuan (US$168.7 billion), down from 1.1 trillion yuan on Tuesday.

China's central bank said on Thursday that there is no basis for further depreciation in the yuan currency given strong economic fundamentals as the yuan fell for a third day on Thursday after the central bank reformed the exchange rate formation system.

Though the yuan opened slightly weaker on Thursday, the spot rate was only about 0.1 percent below the guidance rate, the closest it has been since November, as the central bank tried to slow the sharp sell-off that has knocked around 3.2 percent off the currency since Monday's close.

The People's Bank of China (PBOC) said that the country's strong economic environment, sustained trade surplus, sound fiscal position and deep foreign exchange reserves provide "strong support" to the exchange rate. The PBOC also said that it will monitor "abnormal" cross border flows.

The value of the yuan has gradually returned to market levels after declines during previous days, and the yuan will remain strong in the long run with no basis for persistent and substantial depreciation, said Zhang Xiaohui, assistant governor of the PBOC.

Zhang said that previously there was a 3-percent gap in the yuan's value between the rate and market expectations.

PBOC Vice-governor Yi Gang dismissed suggestions that the government had plans for the yuan to go still lower.

Yi said China would quicken the opening of its foreign exchange market and would attract more foreign investors as it liberalises its financial markets.

On Tuesday, the PBOC reformed the exchange rate mechanism to better reflect market development in the exchange rate of the Chinese yuan against the US dollar.

The move surprised the market and prompted the lowest valuation of the yuan since October 2012. The central parity rate of the yuan against the US dollar weakened by 1,136 basis points on Tuesday and further dipped 1,008 basis points to 6.3306 on Wednesday.

"The central bank is fully capable of stabilizing the exchange rate through direct intervention in the foreign exchange market to avoid herd mentality leading to irrational movements of the rate," economist Ma Jun with the People's Bank of China said in an interview with China Business News on Wednesday after the sharp decline.

In China's spot foreign exchange market, the yuan is allowed to rise or fall by 2 percent from the central parity rate each trading day.

The central parity rate of the yuan against the US dollar is based on a weighted average of prices offered by market makers before the opening of the market and also refers to the closing rate on the previous day, in conjunction with supply and demand and the movement of major currencies.

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