Tuesday’s move will mean the yuan will more fully reflect market fluctuations, Chinese officials say. Exports in July plummeted by an unexpectedly steep 8.3 percent from a year earlier.
American politicians, who have long charged that China keeps its currency artificially low to give its exporters an edge, denounced the devaluation.
“The move signals that [China] is willing to use all available tools, including a weaker currency, to prop up exports and its domestic economy, ” said Eswar Prasad, an economist at Cornell University.
In time, China’s currency move will be viewed as an important step in the country’s multiyear journey toward a more efficient and responsive market-determined system.
“What is good for growth in China is unfortunately bad for everybody else”, said Bill McQuaker, co-head of multi-asset at Henderson Global Investors. US stocks tumbled Tuesday, with the Dow Jones industrial average closing down 212.33 points. The daily fix that sets the value of the Chinese currency against the greenback was lowered to 6.3306 yuan, from 6.2298 on Tuesday, Xinhua quoted national foreign exchange market data as showing. The center of Tuesday’s trading band was set 1.9 percent below Monday’s level. The MSCI All World Index of global shares fell 1.16 percent.
President Barack Obama is using China’s poor reputation in Washington as an argument to support his signature trade agreement, the Trans-Pacific Partnership, which excludes Beijing. “But the fact of the matter is that since China is sitting on huge excess capacities, the government may be tempted to undertake more such measures”.
There are other market implications, too.
China’s central bank has announced another aggressive devaluation of its currency. In April, the Treasury Department praised China’s recent efforts to allow the renminbi to rise, but said the currency remained “significantly undervalued”. Initiatives by Japan and the European Union over the past two years depressed the yen and the euro.
The International Monetary Fund has urged China to merge its government-controlled onshore market with the freely trading offshore market and make its currency more flexible, and Tuesday’s move could be seen as addressing this.
The dollar stood near a two-month high of 125.21 yen brushing aside a slide in U.S. Treasury yields and speculation now held by some that the Federal Reserve could delay hiking interest rates in the wake of China’s move.
Probably not. True, a cheaper yuan hurts U.S. exporters and likely depresses U.S. inflation, which is already below the annual 2 percent rate the Fed targets. The economy is expected to grow less than 7 percent this year, its slowest rate since 1990, and could decelerate even more next year.
They include a one-off reset for now and moderate depreciation leading up to and post the SDR decision, a 3-5 percent weakening in three months, and an abrupt 10 percent devaluation.
If the U.S. economy continues to look healthy, wrote JP Morgan Chase economist Michael Feroli, “the yuan move will largely be a sideshow ” by September’s Fed meeting.