Mumbai, August 12: China’s move to devalue its currency took its toll on the rupee and the Sensex on fears that other countries may soon follow suit.
“This is like a double whammy with China allowing its currency to weaken”, said Wee-Ming Ting, the head of Asian fixed income in Singapore at Pictet Asset Management, which oversees $US19 billion of emerging-market debt.
To make it even more responsive, the People’s Bank of China announced Tuesday that it will now peg the yuan’s value to a variety of market forces.
Yesterday, the People’s Bank of China set the yuan’s midpoint rate lower than Tuesday’s closing market rate, resulting in almost a 4% devaluation of the yuan in two days against the dollar.
On Thursday, the central bank set the yuan’s fixing only marginally lower, a sign it wants to let the yuan depreciate but only in a measured way.
In July 2005, the central bank unpegged the yuan against the US dollar, allowing it to fluctuate against a basket of currencies.
The Washington-based global Monetary Fund said this month that “significant work” still needed to be done for the yuan to be considered before its next review in November.
The comments came as China’s currency headed for its biggest two-day drop in 21 years after the reference rate was cut to the weakest level since 2012. The Shanghai Composite Index fell 1.1 percent to 3,886.32, and shares in Southeast Asia were also lower. Rebublican Senator Rob Portman said the devaluation of the yuan was “another harsh reminder that we can not afford to sit idly by as China refuses to play by the rules”.
The devaluation is a fillip to China’s exporters, but will beat down global commodity prices and hammer large Western companies that export to China.
China’s decision must also be a consideration in other important policy changes that influence markets, including the Federal Reserve’s intense deliberations on when to start its interest rate hiking cycle.
Meanwhile, China will extend the trading hours for the onshore yuan in a move to prompt the convergence of the onshore and offshore yuan market, said Zhang.
The Chinese currency continued its sharp fall for a third consecutive day on Thursday after the central bank reformed the exchange rate formation system. “If the Chinese economy is weaker than maybe what the Chinese authorities anticipated, it’s probably not inappropriate for the currency to adjust in outcome to that weakness” he said.
Currencies in Thailand, the Philippines, Malaysia, Indonesia, South Korea, Singapore and Australia fell on Tuesday, as analysts questioned whether the move would spark a race to the bottom in currency wars.