China’s Move to Cut Currency Reverberates in Global Economy

“Any devaluation greater than five to seven percent would be a serious problem for global markets and China’s trading partners”, said Ashraf Laidi, chief executive officer at Intermarket Strategy Ltd, a research firm in London.

The benchmark TAIEX finished 0.86 percent lower at 8,394.14 yesterday, with foreign investors cutting their positions by net NT$2.99 billion and proprietary dealers by NT$1.39 billion, Taiwan Stock Exchange data showed.

“Markets are a little wary of the implications of China’s devaluation yesterday”.

With this move, China explicitly joins other nations trying to capture economic activity outside their borders, and it is doing so as the global economy is struggling to generate sufficient growth. It is a reflection of the Chinese government’s reaction to its concerns about the declining exports amid volatility in the stock market.

The devaluation is a dilemma for US authorities who have accused the Chinese government for the manipulation of its currency. The Australian dollar is posting an outside day, having initially risen above yesterday’s highs and then sold off below yesterday’s lows. The fund has said in recent months that the yuan needs to be more flexible. “Reform will still be carried out, but it’s taking a backseat to stability”.

The central bank on Tuesday revised the yuan’s central parity rate formation system to give the market a louder voice, and the market answered – with a sharp fall.

Chinese exporters: Local exporters in general benefit from a cheaper yuan. “Debt denominated in foreign currencies just got even more burdensome as a result of the yuan’s devaluation”.

New bank lending has been weak for much of this year, despite a series of interest rates cuts and looser lending restrictions.

“There may be a new additional headwind for the Fed to potentially hurdle as they approach their September meeting”, said Brian Daingerfield, currency strategist at the Royal Bank of Scotland in Stamford, Connecticut.

For Asian currencies, excluding Japan, Morgan Stanley writes that, “the major victims of the above policy changes in China are countries with high export exposure and export competitiveness with China which are coincidentally also suffering from issues of disinflation and overcapacity”.

Exports were responsible for 22% of China’s gross domestic product in 2014, according to data from the World Bank. Overseas sales fell 8.3 percent from a year earlier in dollar terms in July, well below the estimate for a 1.5 percent decline in a Bloomberg survey.

At home, China moved to make sure the devaluation wasn’t perceived as a desperate by the government. The lower exchange rate was just a byproduct, not the goal.

Long-time PBOC Gov. Zhou Xiaochuan for years has push to liberalize the yuan and promote its global use.

Their counterparts at Morgan Stanley also said Asian currencies excluding the yen were likely to slide against the U.S. dollar.

China manages the exchange rate through an official midpoint, from which it can vary 2 percent each day.

The bank said starting Tuesday that in addition to the previous day’s exchange rate, the daily fixing of the trading band will take into account supply and demand. China devalued its currency by 1.9% against the dollar on Tuesday.

“The PBOC hit two birds with one stone”, said Larry Hu, China economist at Macquarie Group Ltd, a Sydney-based investment bank.

Following the change, the central parity rate of the RMB, or the yuan, weakened sharply by 1,136 basis points to 6.2298 against the U.S. dollar on Tuesday.

China said Tuesday that it devalued the yuan, also known as the renminbi or RMB. “In the US, it will likely reignite criticism that Beijing keeps the currency artificially low to help its own manufacturers”.