The market might regain confidence in the yuan if the central bank guided the exchange rate to stabilize at current level after the pressure of depreciation diminished, CICC said.
As the depreciation will attract less money and lead to capital outflows, the central bank may inject liquidity with a cut in the reserve requirement ratio (RRR). Nomura China economist Zhao Yang expects one RRR cut and a benchmark interest rate cut this year.
MARKET-DRIVEN CURRENCY
The exchange rate tumble was triggered by an attempt to bring the central parity rate closer to the market consensus.
"This may lead to significant fluctuations in the short run but after a period of adaptation the intra-day exchange rate movements and resulting central parity fluctuations will converge to a reasonably stable zone," the PBOC said.
The market had anticipated some depreciation, and when the guiding rate was revised the market bridged the previously accumulated differences between the previous rate and the market rate.
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 on Wednesday.
The IMF believes an effective floating exchange rate can be established in China within two or three years.
More flexibility and a bigger say for the market can only help the pursuit of membership of the SDR basket.
"The reform made the yuan more market-driven, laying a foundation for the free exchange of the yuan, " said Liu Weiming, an analyst at China Citic Bank. "It helps clear some technical hurdles for the yuan to join the SDR."
