U.S. warns China against backsliding on currency commitments

Some economists said the devaluation was also designed to support Beijing’s push for the yuan to be included in a basket of reserve currencies known as Special Drawing Rights (SDR), which are used by the worldwide Monetary Fund to lend money to sovereign borrowers. So investors are now concerned that China may elect to keep pushing the yuan lower.

In statement posted on its website, the PBOC noted that effective today, the midpoint for will now be determined by market maker quotes along with the closing level.

China becomes the third major economy to act to lower its currency value.

Asia-Pacific currencies came under pressure on Tuesday after mainland China unexpectedly devalued its yuan currency in the face of weakening growth, driving the dollar higher.

With cracks already appearing in global trade flows, the world’s exporting nations are arguably already scrapping to retain their slice of an apparently shrinking cake, and so currency competitiveness matters.

Since the “taper tantrum” of May 2013, when talk of ending the U.S. quantitative easing programme sparked an emerging market selloff, the yuan has fallen 3 percent against the dollar, while the yen has lost 23 percent and the euro 18 percent. This is not a competitive devaluation and would have at best minor effect in making Chinese exports cheaper.

Laurenti also says he thinks companies with strong enough brands – like Apple – may not be dinged as badly as less popular products because wealthy Chinese consumers may be willing to shell out more to have those name brands.

“They’re doing a big cut in the yuan, and that’s going to be devastating for us”, said the tycoon, a long-time critic of China’s currency policy, in a CNN interview.

The devaluation could present a dilemma for the United States and other governments that accuse Beijing of suppressing the yuan’s exchange rate, giving its exporters an unfair price advantage and hurting foreign competitors.

“It was inevitable that China would join the currency war at some point”. But the central bank said its goal was to give market forces a bigger role, a step Washington has demanded.

Tsai Lien-sheng (蔡練生), secretary-general of the Taipei-based Chinese National Federation of Industries (全國工業總會), said that a depreciation of the NT dollar would be helpful to Taiwanese exports in the short term, but it is not the panacea to declining exports.

“But we expect the PBOC to resist this pressure-it has done over most of the past year-rather than continue to ratchet the reference rate lower”, said Julian Jessop, chief global economist at Capital Markets.

“The competitive devaluation of the yuan is to boost their exports”.

Oil erased most of its gains from Monday following the devalution by the world’s top energy consumer. The greenback also gained against the South Korean won, Indian rupee, and Japanese yen.

Prices for oil and copper fell sharply Tuesday after China’s government lowered the value of its currency.

The big question now for emerging markets, where growth has slowed and capital flight has increased dramatically this year, is whether their officials respond to China’s move in kind.

The S&P/TSX composite index dropped 159.03 points to 14,307.36, almost offsetting a 163.4-point gain on Monday.

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