China raises yuan fix for 1st time since devaluation

There’s also the threat a cheaper yuan poses to exports and economic growth in other countries.

Will the Federal Reserve begin to raise short-term interest rates in September given the devaluation of the Chinese yuan? Since 2005, it said the yuan’s real effective exchange rate appreciated more than 55%. Renminbi devaluations in the future, like the one that just happened, will lower the value of other currencies against the US dollar, offsetting the desired effect for China. The composition of the basket is a secret, but it’s believed to be dominated by the U.S. dollar.

The cut, which was smaller than those in the previous two days, and news the central bank intervened to stabilise the yuan on Wednesday reassured dealers Beijing would not allow its currency to slump.

In China’s spot forex market, the yuan is allowed to rise or fall by 2 percent from the central parity rate each trading day.

The yuan, halted a three-day slide after the central bank soothed market sentiments on Thursday, reversing short but sharp declines triggered by a foreign exchange (forex) policy change. Angus Nicholson, a market analyst at IG in Melbourne said the pace of decline would slacken, but that the currency could depreciate by 10 per cent or more over the next 12 months.

China determines a midpoint level for the value of the yuan. “There is not a sense that the onshore yuan will weaken forever”. Many economists also suspect a contributing factor: Beijing may be desperately trying to boost its economy. As an indication of enough funds in the money market, the benchmark seven-day repo rate has generally headed lower since hitting a recent peak of 2.92 per cent on June 26. Today’s devaluation could affect orders delivered next year, but that is unlikely to quickly counter current sources of weakness in the Chinese economy. Perhaps the Chinese economy is decelerating even faster than anyone realizes.

It said that China’s strong economic environment, sustained trade surplus, sound fiscal position and deep foreign exchange reserves provided “strong support” to the exchange rate. Signs of trouble are accumulating. The surprise move earlier this week to loosen the mechanism that controls the yuan and send the currency lower reverberated through global markets but the turmoil is now abating.

Citing Swiss tourism shopping tax refund firm Global Blue’s April report, which said that 40% of Chinese travelers shop for resale purposes, the paper said a weaker yuan could bring a portion of the overseas purchases back to China. “All in all, there is no need to raise rates in a hurry”, said Masafumi Yamamoto, senior strategist at Monex Securities.