Despite policymakers taking monetary easing measures to tackle currency fluctuations, expectations of a further yuan depreciation persist ahead of possible increase in interest rates by the United States Federal Reserve.
On Wednesday, the yuan's reference rate declined to a four-year low of 6.4043 per dollar, 0.09 percent weaker than the levels on Tuesday. Offshore yuan in Hong Kong was trading at 6.4930 per dollar, or 1.14 percent lower than the onshore spot price.
Close on the heels of the currency depreciation was the combined 25-basis-point cuts in the benchmark interest rates and a 50-basis-point reduction of the reserve requirement ratio - the amount of cash that must be held by financial institutions as reserves, announced by the People's Bank of China on Tuesday.
Lu Lei, head of the PBOC Research Bureau, told China Daily that interest rates have been cut to lower the financial costs for companies, while the RRR cut is designed to ease the capital outflow pressure due to the yuan depreciation.
"A lower RRR can inject liquidity into the financial sector and strengthen financial institutions' ability to deal with foreign exchange fluctuations," said Lu.
Economists said the policy easing is likely to release around 700 billion yuan of liquidity immediately, to offset the sharp decline of foreign exchange assets since July.
Wang Tao, chief economist in China at Swiss financial services firm UBS AG, said the slump in foreign exchange assets by 308 billion yuan in July points to accelerated capital outflows.
Though the US Federal Reserve has not yet made a final decision on interest rates, it is likely that it may hike rates in the near future. Such a move will increase investors' preference for dollar assets and add to yuan depreciation pressures, based on the market-oriented system, said economists.
"We don't think the rate and RRR cuts will lead to more depreciation of the yuan in the near term, and we believe the central bank will continue to maintain a relatively stable currency in order to anchor market expectation," said Wang.
"We expect the rate and RRR cuts to contribute to the macro stability of the Chinese economy. The market expectations are that yuan will likely improve," she said.
Premier Li Keqiang said on Tuesday that there is no longer any basis for continued depreciation of the yuan, as economic fundamentals remain stable and growth is still within a reasonable range.
The yuan depreciated by more than 3 percent against the US dollar on three consecutive days starting Aug 11, as the government accelerated its foreign exchange reforms and allowed the market to decide the currency value.
