China Intervenes to Support Yuan

Some members of the U.S. Congress have called for imposing retaliatory tariffs. The devaluation triggered selling of shares, oil and other commodities on expectations of weaker demand from China.

For the second-straight day, China has allowed its currency to take a sharp drop, sparking another round of falling stock prices internationally. It “could intensify currency competition among the major advanced and emerging market economies that are looking to cheaper currencies to boost exports”.

Beijing’s move could complicate the U.S. Federal Reserve’s decision about when to raise interest rates that have been near zero since the 2008 global financial crisis.

SG Global Economics said in a research report that it saw a “bias for further depreciation” in the yuan, extending to 5 percent over 12 months. By making Chinese goods comparatively cheaper in the United States, a lower-valued yuan would contribute further to already-low U.S. inflation.

“However, suggestions that China is engaging in a currency war could undermine the political goodwill towards it that will ultimately decide whether or not it is permitted to join”. The Dow Jones industrial average lost 157 points, or 0.9 percent, to 17,457.

Analysts cautioned against seeing Beijing’s move as a direct effort to help Chinese exporters. That meant the yuan rose with the dollar over the past year, hurting Chinese exporters and raising the threat of politically risky job losses.

Wednesday’s decline accompanied weaker economic data for July. “The rupee’s relative strength against its trading partners has been of the concern for policymakers due to the need to support India’s flagging export growth and underpin government’s broader push to revive the domestic manufacturing sector”, it said, adding that its economists expect the rupee to depreciate further to 65.60 against the dollar. Prices for oil and copper fell sharply Tuesday after China’s government lowered the value of its currency, suggesting weakness in the world’s second-largest economy. A sustained yuan downturn would kill the carry trade.

Neighboring Vietnam announced it was widening the band in which its own currency, the dong, is allowed to fluctuate each day from 1 percent to 2 percent.

The center of Tuesday’s trading band was set 1.9 percent below Monday’s level. Germany’s DAX dropped 3.3 percent, France’s CAC 40 dropped 3.4 percent, while Britain’s FTSE 100 lost 1.4 percent.

“The two-day depreciation is the biggest since 2005 when China unpegged the yuan against the U.S. dollar and moved to the “managed float” regime”, reports the South China Morning Post.

CURRENCIES: The dollar fell to 124.23 yen from 125.18 yen in the previous trading session.

The yuan has risen by about 3.5 percent per year since 2012 on a trade-weighted basis and the latest change only gives back part of that, according to Varathan.