China tries to quell fears of more big devaluations

“China does not have the need to start a currency war to gain advantage”, he said.

Shock waves from the devaluation had spread through financial markets, causing stocks and Asian currencies to tumble.

The value of the Chinese yuan has been gradually rising for 10 years.

The Malaysian ringgit rebounded 0.4% to trade at 4.0210 against the U.S. dollar, which rose to as high as 4.0380 ringgit Wednesday.

On Tuesday, the People’s Bank of China (PBOC) reformed the exchange rate mechanism to better reflect market development in the exchange rate of the yuan against dollar. On Tuesday, the central bank set the target 1.9 percent below Monday’s – the biggest one-day change in a decade.

It is more reasonable, therefore, to see China’s move as a way to seek long-term financial resilience and further internationalisation of its currency by gradually liberalising its exchange rate formation system. Chinese people, anxious about the economy and seeking investment opportunities overseas, have been pulling money out of the country.

The yuan’s spot value fell further after Beijing released weak July output and investment data, trading as low as 6.4510 to the dollar.

Given China’s slowdown, some weakening in the yuan seems justified.

Or so Beijing says.

The devaluation likely matters more for the U.S. inflation outlook than the country’s growth prospects because American businesses import much more from China than they export to it, said Stephen Freedman, senior investment strategist at UBS Wealth Management Research. “The market is just a little bit comforted by the fact that the size of the (yuan) devaluation today was a little lower at about 1.1 per cent“, Ric Spooner, chief market analyst at CMC Markets.

Plenty of reasons. The surprise devaluation suggests that something is spooking the Chinese government. It is also fanning tensions with the United States and Europe, whose exports could become comparatively costlier. Signs of trouble are accumulating. “It will dampen the confidence of investors in holding yuan, and affect the process of the internationalisation of the renminbi”.

China’s rivals see it as a way to boost exports and prop up the market. The currency fared worse in global trade, touching 6.59 to dollar.

On the decision to allow market forces to play a greater part in dictating the yuan’s level, Yi Gang, PBOC vice governor, outlined that a rigid exchange rate was not sustainable nor suitable for China. The Fed wants to be “reasonably confident” inflation is returning to its 2% target before raising rates.