Keep calm and carry on. The plunge in the Chinese currency isn’t the start of a crisis like Asia saw in the late 1990s.
At least, that’s the call of Normura Holdings, even though last time the yuan fell as much as it did this week was two decades ago.
Even thought China’s foreign reserves fell from a peak of $4 trillion to $3.7 trillion, it’s still the largest in the world. The foreign-currency debt is just 10% of gross domestic product, wrote Nomura currency strategists Jens Nordvig and David Fritz in a note Thursday. And that’s less than a quarter of the levels in Malaysia and Thailand when the financial crisis started in 1997
“While a more sustained move toward a weaker yuan seems quite probable, we are inclined to think the authorities will remain in control of the situation,” Nordvig and Fritz wrote. “This suggests that gradualism will still be a part of policy-making in China, and this may mean that the worst shock effect is behind us.”
The Chinese government surprised the market on Tuesday, when it decided to unpeg the yuan from the US dollar and let it float. On Tuesday, against the dollar, the yuan sank 1.9% to it’s limit, and repeated that Wednesday, falling to a four-year low.
However, by Thursday, the foreign exchange market seemed to have discovered a price it liked. After tumbling 0.9%, the yuan recovered by the end of the Asian trading day to close down 0.3%, or 6.39 yuan to each dollar.
An official from the People’s Bank of China publicly defended the central bank’s move to devalue the yuan, and insisted that rumors the central bank wants the yuan to depreciate by 10% were “nonsense,” reported Marketwatch.