What’s behind the China’s yuan devaluation

Vice-governor Yi said China would quicken the opening of its foreign exchange market and would attract more foreign investors as it liberalises its financial markets. China’s yuan fell again but the decline was smaller than before. The composition of the basket is a secret, but it’s believed to be dominated by the U.S. dollar.


China tried Thursday to ease fears of more big declines for the yuan as companies from global automakers to Chinese clothing exporters faced a new era of uncertain exchange rates.

“The key thing will be, does the currency begin to move in a variety of directions and show market-oriented volatility?”

“That will make things easier when Xi Jinping visits”, Kennedy said.

A further motivation for China reducing the value of its currency against the dollar is the fact that its economy is slowing, partly because of the change in the structure of the Chinese economy to a more consumer and services-driven model, as I argued in my column in Monday’s Telegraph.

The initial reaction from U.S. lawmakers to the depreciation, particularly Democrats, has been swift and negative. The People’s Bank of China keeps its value against the dollar within a 2pc range of a “reference rate” a bit like the Exchange Rate Mechanism (ERM) of which the UK was a member in the early 1990s. It has dropped a total of 2.9 percent since Tuesday. Chuck Schumer, a New York Democrat. Chuck Schumer. “Rather than changing their ways, the Chinese government seems to be doubling down”.

The yuan opened slightly weaker but the gap between the guidance rate and the traded rate closed sharply as the central bank moved to stem a sharp selloff that saw the currency lose around 4 percent in just two days. The People’s Bank of China has found itself intervening quite heavily in the currency markets before this week to defend the yuan.

Earlier in the day, the central bank appeared to take into account Wednesday’s closing price when setting the yuan’s daily trading level. That meant the yuan rose as the dollar jumped over the past year, hurting its exporters and raising the threat of politically risky job losses.

On a larger scale, however, more flexibility could end the yuan’s status as a stable anchor among currencies of developing countries, said Rajiv Biswas, chief Asia economist for IHS.

Worldwide traders have long coped with swings by the dollar, euro and other currencies.

So perhaps we should not be so surprised by the decision to devalue the yuan.

The U.S. Treasury Department’s reaction Tuesday to the depreciation was measured. “There is no basis for a continued depreciation of the renminbi’s exchange rate”.

“Some will continue to rail at China whatever happens”.

John Frisbie, president of the US-China Business Council, which advocates for American businesses, said its membership is typically more concerned about the impact of China’s economic slowdown, rising costs, regulatory restrictions and intellectual property theft than currency.

The move to devalue the yuan has reignited speculation about “currency wars” the idea that a country is manipulating the value of its exchange rate to get some unfair advantage over its trading partners. That replaced a strategy under which the rate was based on a basket of currencies.


She said that would represent a “sea change in China’s exchange rate policy” but would help to support flagging economic growth.

Q&A: What's behind the China's yuan devaluation