China’s yuan slides in value after Beijing alters controls

Sustained weakness in the yuan raises the risk of tensions with China’s trading partners.

Such arguments have diminished as the yuan’s value rose, but Washington and others still are pressing Beijing to allow the market to set its exchange rate.

China devalued its currency on Tuesday amid a slowing economy and a stock market slump. Initiatives by Japan and the European Union over the past two years depressed the yen and euro.

Recent data has revealed China’s overseas shipments fell 8.3 per cent in the year to July, which was much worse that the 1.5 per cent decline that was expected.

It had earlier foreshadowed the move by saying the strong yuan was putting pressure on exports.

FILE – In this August. 7, 2003 file photo, a Chinese bank worker displays Chinese yuan at a bank in Beijing. “It is hard to see a major impact of this on Indian stock markets or the economy unless yuan depreciation becomes a trend which seems unlikely at this stage”, he said. She said that would represent a “sea change in China’s exchange rate policy” but would help to support flagging economic growth.

The US government has also accused China of keeping the yuan undervalued to boost its exports in the past.

“They are trying to bolster their economy and the easiest way of doing it is by making it better for their exporters and make themselves more competitive again globally”, said Tim Kelleher, head of institutional FX sales New Zealand at ASB Bank.

The People’s Bank of China’s announcement “looks to be a move to a more open market policy”, Stephen Innes, a senior trader at OANDA, told Bloomberg News.

The People’s Bank of China set the midpoint for the yuan at 6.2298 per dollar, down from the previous day’s fix of 6.1162 per dollar, and said it was aiming for 2 percent depreciation.

Khoon Goh of ANZ Research believes this is quite a momentus move and a big shift in the way the Chinese central bank manages its currency. The PBoC said the exchange rate has deviated from the market rate by a large margin for a long time, and this action was required to improve the renminbi exchange rate. The Dow ended Monday with gains of 1.39 percent, while the S&P 500 climbed 1.28 percent and the Nasdaq 1.16 percent.

The Australian dollar lost 1 percent against the dollar on China’s devaluation, and the South Korean won also lost ground, though traders suspected authorities in Seoul were selling dollars to smooth that currency’s fall.

He suggests a combination of lower global growth, weaker Australian terms of trade, narrowing interest rate differentials between the US and Australia, US dollar strength and continued pressure on Asian currencies will continue to weigh on the Aussie moving forward.