In the first reaction from the Obama administration to the People’s Bank of China’s almost 2.0 percent cut in the yuan’s reference rate to the dollar, the Treasury said it had pressed China for a more flexible exchange rate that reflects the market. Going forward, the yuan will be fixed at a rate within 2 percentage points of the previous day’s market rate.
“The argument that China is trying to spur growth by weakening its currency to spur exports does not strike us as very convincing”, said Paul Gruenwald, S&P’s chief economist for Asia-Pacific. Republication or redistribution of content provided by EconoTimes is expressly prohibited without the prior written consent of EconoTimes, except for personal and non-commercial use.
Falling commodity prices have been blamed for producer price deflation, putting China at risk of repeating the deflationary cycle that blighted Japan for decades.
About 7.1 billion shares changed hands on US exchanges, compared with the 6.9 billion daily average for the month to date, according to data from BATS Global Markets.
“This is a sign to markets that they are not seeking a massive devaluation“, Brown Brothers Harriman head of currency strategy Marc Chandler told The Financial Times. For a second day in a row, China’s central bank devalued its currency. But when that did little to assuage market turbulence, the government changed course by instructing state-owned Chinese banks in the final minutes of trading to sell dollars on its behalf, the Wall Street Journal reports.
“China is the only major saver with an overvalued currency and would benefit from a weaker renminbi as it rebalances towards consumer spending”. “Combine that with uncertainty around the US Federal Reserve’s upcoming interest rate hike”, she said.
He said, “These fundamentals would cause any free-floating currency to fall in value, so it should not come as a surprise to see the devaluation occurring and further weakness could follow as China attempts to give provide its exporters with a more competitive environment”.
China, the world’s second-largest economy, wants to be included in the IMF’s Special Drawing Rights (SDR) basket.
China’s decision to tolerate a weaker currency has fanned fears its economy, long an engine of global growth, is slowing much faster than thought.
India’s exports will be hit and the trade deficit might widen after the devaluation of Chinese currency yuan by 2%, which is bound to raise the competitiveness of outbound shipments from the neighbouring country, Federation of Indian Export Organisations(FIEO) said on Tuesday.
China’s three mid-point shifts have now shaved 4 per cent off the yuan since Monday.
This means the U.S. dollar appreciates, or rises in value, which hurts prospects for U.S. exporters because their products become more expensive overseas, says Fuqua School of Business professor Campbell Harvey.
RESPONSE: The global Monetary Fund welcomed Beijing’s move to loosen its exchange rates.