Vietnam doubles currency band after China devaluation

China’s central bank cut its reference rate by 1.9 percent, triggering the yuan’s steepest one-day loss since the nation unified official and market exchange rates in 1994.

The spot rate fell about three percent to its lowest level since October 2012 when the central bank reformed the exchange rate formation system on Tuesday.

Rattled investors sent markets around the world sliding. And by noon Wednesday, the Dow had dipped to a 2015 low.

But reactions among economists are split.

China’s move to devalue its currency by 4 per cent has caused convulsions on global financial markets over the past two days. And Fed chair Janet Yellen has been citing the strong dollar as one drag on the slowly recovering U.S. economy.

“The challenge for the PBOC is the market interpreted (the devaluations) as a signal that (Chinese) policymakers have embarked on a path of competitive devaluation with more moves to follow”, analysts at Capital Economics wrote in a research note. It won’t be an easy ride.

“If the Communist Chinese devalue the yuan against a dollar that is appreciating against gold, has the yuan gone up or down? Still, it is most likely that the Australian dollar will be hard on the yuan’s heels, leading to a zero sum game. The economy exploded, and eventually the yuan was frozen again.

The devaluation had sparked fears of a global currency war and accusations that Beijing was unfairly supporting its exporters.

DBS called the devaluation a “small and long-overdue adjustment that barely begins to make up for the really big moves in the dollar, euro and yen“.

But the currency is hardly free-floating. By our lights this is but another effect of the failure of the Congress to exercise its constitutional power to coin money and regulate the value thereof and of foreign coin and to fix the standard of weights and measures.”.

To hem in yuan prices, the PBOC keeps an arsenal of almost $3.7 trillion in global currencies to deploy as the need arises.

The yuan weakened further on Wednesday, hitting a four-year low, as the central bank was suspected of intervening via state banks to support the yuan. Utilising reserves implies buying Yuan to maintain the peg, which reduces liquidity in the interbank system and has consequences for credit creation and financial stability.

China has a number of motivations that are aligning. A deep slump will certainly affect global demand and economic growth, perhaps even enough to trigger recessions in some of its trading partners.

China becomes the third major trader to take actions that lower the value of its currency. Meanwhile, domestic Chinese manufacturers benefit as the cost of importing goods grows.

To some extent, the Apple stock sell-off may simply reflect a belief that this devaluation is an indicator of worsening economic conditions in China.

The selloff took the MSCI Emerging Markets Index’s decline from a peak last September to 20 percent, the threshold for a bear market. Stephen Roach, a senior fellow at Yale University who was a non-executive chairman for Morgan Stanley in Asia, told Bloomberg that what the People’s Bank of China did “raises the distinct possibility of a new and increasingly destabilizing skirmish in the ever-widening global currency war”.

The International Monetary Fund staff recommended last week that China wait until at least October 2016 to join.

Tata Steel also said that depreciation in the Chinese unit is likely to result in more steel imports.

But other large exporting economies might not be so happy.

China has seen a slowdown in economic expansion, with data pointing to less than 7 per cent growth this year – although official figures are regarded with suspicion so the situation might be worse than that.

On a trade-weighted basis, China’s yuan has been rising in recent years in part because of its peg to the U.S. dollar.

Lardy finds the argument contradictory. In a statement explaining the move, the PBOC assured that the move wasn’t an effort to boost its economy.