China has devalued its currency after a run of poor economic data, according to the country’s central bank on Tuesday.
The central bank said the devaluation was due to its official guidance rate, which was down nearly 2 per cent to 6.2298 yuan per dollar – its lowest point in almost three year.
Some analysts suspect the devaluation could be the beginning of a longer-term slide in the exchange rate.
But the apex bank said the devaluation was a change in methodology to make it more responsive to market forces.
“Since China’s trade in goods continues to post relatively large surpluses, the yuan’s real effective exchange rate is still relatively strong versus various global currencies, and is deviating from market expectations
“Therefore, it is necessary to further improve the yuan’s midpoint pricing to meet the needs of the market,’’ the central bank said.
It was the biggest one-day fall since a massive devaluation in 1994 when China aligned its official and market rates.
The devaluation also followed weekend data that showed China’s exports tumbled 8.3 per cent in July, hit by weaker demand from Europe, the United States and Japan.
Besides, producer prices were well into their fourth year of deflation.
The People’s Bank of China (PBOC) called it a “one-off depreciation”, but economists disagreed over the significance of a move that reversed a previous strong-yuan policy that aimed to boost domestic consumption and outward investment.
“For a long time, I gave the PBOC credit for holding the line on the renminbi (yuan) and recognising that while it might be tempting to try to shore up the old-growth model by devaluing the currency that really was a dead end.
“A strong yuan is needed to force China toward consumption and away from low-end manufacturing.
“What the world needs from China is not more supply; what it needs is demand,’’ said fund manager Patrick Chovanec of U.S.-based Silvercrest Asset Management.
The move hurt the Australian and New Zealand dollars and the Korean currency, fanning talk of a round of currency devaluations from other major exporters.
But some of Asia’s most interventionist central banks appeared to be holding their nerve on currency policy.
“I don’t think the move will trigger a global currency war,’’ a Japanese policymaker said.
Economists pointed out that until Tuesday, China had held the yuan firm while its neighbours had debased their currencies.
Growth in China, the world’s second-largest economy, has slowed markedly this year and is set to hit a 25-year low even if it meets its official 7 per cent target.
The devaluation hit shares in Asia and Europe. Chinese airline stocks also fell, given the impact higher fuel prices would have on their bottom line, though exporter stocks rose.
The IMF proposed in a report this month to put off any move to add the yuan to its benchmark currency basket until after September 2016.
IMF also gave mixed reviews of Beijing’s progress in making key financial reforms to its currency market. – Reuters.
