US Warns China Against Backsliding on Currency Commitments

Now, China has done a U-turn.

China’s currency fell sharply in value on Tuesday following the central bank’s decision to improve its “central parity system” to better reflect market development in the exchange rate between the Chinese yuan against the U.S. dollar. At home, it signals that Beijing is growing increasingly anxious about its slowdown in economic growth.

The U.S. dollar could strengthen. It dropped to a two-month low of 64.19 per dollar. “Reform will still be carried out, but it’s taking a backseat to stability”. “The key will be the response of other central banks”, said Nick Lawson, managing director at Deutsche Bank in London.

China’s surprise move Tuesday to devalue its currency has intensified concerns about the world’s second-largest economy, whose growth has reached a six-year low.

China had to balance the need to boost exports with the risk of a cash exodus, Tom Orlik, chief Asia economist at Bloomberg Intelligence, said in a research note.

Among other companies with big exposure to China, Caterpillar was down 2.6 percent at $78.04 and Yum Brands dropped 4.9 percent to $83.54.

“It’s time for the (Obama) administration to focus more intensively on China’s cheating and label the country a currency manipulator”, Democratic Senator Bob Casey, a member of the Senate Finance Committee, said in a statement.

Chinese tourists who have become a common sight in the world’s major cities said they feared their wings would be clipped if the devaluation developed into a deeper dent in their spending power.

Many factors affect import and export performance, Tsai said, stressing that Taiwan’s long-term economic health depends on the state of the global economy and the state of its information and communications technology (ICT) sector.

July exports fell by an unexpectedly large margin of 8.3 percent from a year earlier. India’s overall exports have contracted for seven straight months until June 2015. The stock’s price target was also lowered at Jefferies from $130 to $135 on worries about how the devaluation would affect Apple’s sales in China.

Spot yuan tumbled around 2% to as low as 6.3360, the weakest since September 2012 and the biggest drop since the currency was officially devalued in 1994. The yuan is linked to the dollar’s value, which has jumped in the past year. It has repeatedly named maintaining the stability of the yuan’s exchange rate as one of its top priorities.

The Australian dollar, often used as a liquid proxy for the yuan, fell 1.1 percent to $0.7324 as the U.S. dollar rose 0.4 percent against a basket of currencies before paring gains.

The Malaysian ringgit and the Indonesian rupiah hit lows not seen since the Asian financial crisis 17 years ago while the U.S. dollar gained 2.2 percent against Brazil’s real, putting it in range of levels not seen since 2003.

The bank said starting Tuesday that in addition to the previous day’s exchange rate, the daily fixing of the trading band will take into account supply and demand.

“The PBOC hit two birds with one stone”, said Larry Hu, China economist at Macquarie Group Ltd, a Sydney-based investment bank.

A cheaper yuan will benefit China’s products by making them less expensive overseas.