China central bank capable of stabilizing yuan

The recent fluctuation of the yuan exchange rate is "within control" and the central bank is "fully capable" of stabilizing the market if necessary, a central bank economist said on Wednesday.

"The central bank, if necessary, is fully capable of stabilizing the exchange rate through direct intervention in the foreign exchange market to avoid herd mentality resulting in irrational movements of the rate," economist Ma Jun with the People's Bank of China told reporters.

In addition to China's economic fundamentals that will underpin a stable currency, the country's substantial foreign exchange reserve, the world's largest at 3.7 trillion U.S. dollars, will make it better placed to stabilize the rate in the near term, Ma noted.

His comments came as the Chinese currency continued to fall on Wednesday after the central bank changed 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.

The central bank on Tuesday adjusted the exchange rate formation system so it now takes into consideration the closing rate of the inter-bank foreign exchange market on the previous day, as well as supply and demand in the market, and price movement of major currencies.

In response to doubts that the yuan rate would lead to competitive depreciation of other currencies in Asia, Ma said China "does not have the intention nor the need" for initiating such a move.

The economist said China's weak exports data in June, which slid 8.3 percent from a year ago, should not be over-interpreted as factors such as a high comparison base also played a role. As the world economy recovers, exports will gradually pick up in the latter half of the year.

That, along with increasing domestic demand on the back of pro-growth policies, will put China on track to deliver its 7-percent growth target.

"From this prospective, China does not have the need to start a currency war to gain advantage," Ma stressed, adding the yuan's current rate is "near equilibrium".

By making the exchange rate mechanism more market-oriented, some analysts have speculated that China is pushing for inclusion of the currency in the Special Drawing Right (SDR) basket.

The IMF on Wednesday welcomed the move and said a more market-oriented exchange rate would facilitate the SDR operation, should the RMB be included in the basket.