Exchange rate fluctuation is normal, says central bank

There is no reason why yuan should continue to depreciate, the central bank said on Wednesday, despite a further 1.6 percent cut in the reference exchange rate against the US dollar.

The People's Bank of China devalued yuan to 6.3306 per dollar, from 6.2298 on Tuesday, the largest single-day drop by 1.86 percent since 1994.

"The exchange rate fluctuation is normal, as the regulator's move is based on demand and supply situation in the market," said a statement released on the PBOC's website.

The yuan's additional depreciation by 1.6 percent came after the central bank reported that broader money supply, or the M2, unexpectedly surged in July by 13.3 percent year-on-year from 11.8 percent in June. Meanwhile, the new yuan loans increased to 1.48 trillion yuan, up by 14.4 percent last month.

The central bank is determined to set the daily reference rate based on a market-maker quote system after taking into account the previous trading day's closing price, the movements of the world's major currencies, and the demand and supply of yuan in the market.

The closing price was 6.3231 yuan per dollar on Tuesday, 1.5 percent lower than the central parity. The currency's trading price can be higher or lower by at most 2 percent of the fixed rate every day.

"We will maintain a proactive monetary policy and the major economic indicators signal positive changes. All the factors will provide sound macroeconomic environment for a stable exchange rate of yuan," said the statement.

The sufficient foreign exchange reserve, increasing demand of yuan in global investment and trade, and the country's persistent export surplus will support a strong currency, it said.

The central bank also pledged to continually promote the market-oriented exchange rate mechanism, maintain the reasonable fluctuation, and keep the currency value stable.

Ding Zhijie, a professor at the University of International Business and Economics, called the central bank's move a significant measure, adding that it can help prevent shocks if the US Federal Reserve decides to raise its interest rates.