Yuan falls to 4-year low in Wednesday trading

On past precedent, a devaluation of the yuan is usually accompanied by a devaluation of the won, but industries that compete directly with Chinese exports in overseas markets or generate revenues from Chinese tourists are expected to suffer.

But the new mechanism still gives officials some discretion in setting the rate, so that it will not automatically follow the market. Those falls amount to a 3.1% drop for the week. Instead, it links the yuan’s value to a basket of currencies.

Thursday’s yuan guidance rate was set 1% down, a smaller margin than the shock cuts earlier in the week. Some of these currencies saw a rebound after a two-day fall. The selling pressure was fueled by a report which showed Iran crude oil production for July was the highest level it’s been in at least two years, according to OPEC.

Economist Brian Jackson is with IHS Economics China Regional Service.

The US dollar weakened against most major currencies, with US debt yields lower also, as investors questioned whether China’s devaluation would affect the Federal Reserve’s plans to raise interest rates later this year.

“The move signals that (China) is willing to use all available tools, including a weaker currency, to prop up exports and its domestic economy”, said Eswar Prasad, an global economist at Cornell University.

European stocks didn’t have time to recover from the global sell-off, falling 2.7% for the biggest one-day loss since October.

China’s loosening of controls on its currency has led other nations in the area to do the same.

Some experts are saying the move could be a sign of an opening currency market in China. “If the Chinese economy is weaker than maybe what the Chinese authorities anticipated, it’s probably not inappropriate for the currency to adjust in effect to that weakness” he said.

Investors are expecting a prolonged depreciation of the yuan and forecast bigger price swings as the central bank seeks to engineer a controlled weakening of the yuan. But, he says it is possible that the government will intervene less often.

The move sent Asia-Pacific currencies plummeting, pushing the Malaysian ringgit to 17-year lows, on fears the cut could hurt other regional economies and spark a race to the bottom by central banks in a bid to keep their exports competitive.

“While it is too early to judge the full implications of the change in the [People’s Bank of China] reference rate, China has indicated that the changes announced today are another step in its move to a more market-determined exchange rate”, a Treasury spokeswoman said Tuesday. Caty Weaver was the editor.