China rushes to calm fears over plunging yuan

“A falling yuan and a rising bilateral U.S. trade deficit with China will sharpen congressional criticism of China’s currency policies”, he said. Germany’s DAX dropped 2.9 percent, France’s CAC 40 dropped 3.1 percent, while Britain’s FTSE 100 lost 1.4 percent.

“The more liberal approach to managing the exchange rate could bolster China’s claims that the renminbi is ‘freely usable, ‘ strengthening its case for inclusion in the IMF’s SDR currency basket”, said Innes-Kerr of the Economist Intelligence Unit.

The central bank will keep a close eye on capital outflow and the decision by the US Federal Reserve to hike the interest rates, which is expected to happen as soon as next month.

The risk-averse mood after China’s moves this week had heightened the appeal of safe-haven government debt, which then pushed down US Treasury yields and pressured the US dollar. But after a decade of little or no movement, the change rattled financial markets and threatened to fan political tensions with Europe and the United States.

Chinese stocks turned negative in midday trading on Thursday, diverging from the rest of Asia, after the Chinese central bank reiterated that there was no basis for continued currency depreciation.

Financial analysts say the yuan could be overvalued by up to 10 percent.

Or so Beijing says.

Chinese economic data released late in the Asian session underscored Beijing’s need to prop up its economy. But a cheaper yuan also benefits China by making exports less expensive to overseas customers.

Plenty of reasons. The surprise devaluation suggests that something is spooking the Chinese government. Already, the International Monetary Fund is forecasting 6.8 percent economic growth in China this year, the slowest rate since 1990. There are signs of trouble brewing in Germany over the bailout.

NO PARADE: Macy’s reporting a drop in quarterly profits and sales on Wednesday, as the department-store chain was hobbled by weak tourist spending and delays at West Coast ports.

Investors are also anxious about how a weaker yuan will affect exporters in other countries.

Then there’s the chance that other countries will adopt copycat devaluations to help their exporters compete with China, thereby igniting a currency war that disrupts global trade.

China becomes the third major trader to take actions that lower the value of its currency.

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“.

The People’s Bank of China set its midpoint rate at 6.4010 per dollar prior to market open, weaker than the previous fix of 6.3306. The Fed wants to be “reasonably confident” inflation is returning to its 2 percent target before raising rates.