Yuan Devaluation Boosts Investors Betting Against Asia

The value of the Chinese yuan has been gradually rising for 10 years. They had unrealistic expectations: The market has since slammed into reverse, falling by a third in less than a month and wiping away $4 trillion in wealth….

Figures released at the weekend showed Chinese exports fell more than 8 percent in July, adding to concerns the world’s second largest economy is heading for a slowdown.

The development came on the back of a similar fall in global oil prices on Wednesday when every US dollar topped 65 Russian rubles, AFP reported.

Economist Brian Jackson is with IHS Economics China Regional Service. “So what that has meant is that, over the past year, exports from China to other countries besides the United States have become roughly 13 percent more expensive”. He says the change also improves the chances China’s currency will play a larger role in worldwide commerce.

The latest reform actually increases China’s flexibility and independence in foreign exchange control, as a rigid exchange rate system is open to speculative attacks, Guan told Shanghai’s China Business News. From that point, the value could go up or down by two percent, but in many cases, officials would intervene.

The issue has faded somewhat in recent years as the yuan was allowed to appreciate by some 30% against a basket of currencies and Chinese labor costs rose sharply, leading the worldwide Monetary Fund in May to declare that the yuan was no longer undervalued.

China’s currency fell further Wednesday, keeping global investors on edge.

The move followed a 1.9 percent devaluation of the renminbi on Tuesday. Glenn Maguire is chief Asia-Pacific economist at ANZ bank. Currency dealers said public sector banks offloaded dollars at the behest of the Reserve Bank of India (RBI). Share markets in most parts of the world tumbled on fear of action from central banks of major economies to shield their industry from a flood of cheaper imports.

European and Asian equity markets were hit hard by the move.

The currency move reinforces anxiety that Chinese growth is slowing down fast.

In the first reaction from the Obama administration to the People’s Bank of China’s almost 2.0 percent cut in the yuan’s reference rate to the dollar, the Treasury said it had pressed China for a more flexible exchange rate that reflects the market.

A number of US lawmakers yesterday condemned China’s move as a way to keep its currency artificially low giving its exporters an edge. All this could lead to lower earnings for U.S. companies.

The IMF’s board is scheduled to meet in November to decide whether to include the yuan in the SDR basket, which could then happen in 2016 when China assumes the presidency of the Group of 20 club of rich and developing nations. The U.S. dollar also gained against a raft of Asian currencies including a 0.5 per cent rise against the Indian rupee and a 1.5 per cent jump against the South Korean won.