Chinese central bank devalues yuan by nearly 2%

The yuan suffered its biggest fall in more than two decades yesterday after the Chinese central bank surprised markets by devaluing it by almost 2 per cent, firing a broadside in what some analysts saw as a looming currency war.

In a move largely seen as an effort to boost China's flagging exports and slower growth in the economy, the People's Bank of China (PBoC) raised the dollar/Chinese yuan mid-price (the fixing) to 6.2298 from 6.1162.

Currency wars

The

devaluation

was flagged as a one-off move but many read it as China’s official entry into the currency wars. It boosted the dollar and sent the yuan to a three-year low against the greenback, and also raised the spectre of fresh salvos in the currency wars.

The news prompted investors to focus on risks to the global economy, and has also sparked a debate about whether China devalued its currency, or allowed it to devalue. The stronger dollar drove crude oil down after it made significant advances on Monday, while gold hit three-week highs.

China’s central bank tightly controls the value of the yuan, also known as the renminbi.

The PBoC said in a statement on its website the move was a one-off adjustment which is part of the foreign exchange fixing reform, for which markets have been waiting a long time.

News of the revaluation coincides with bad news for Chinese exports and the delayed decision by the International Monetary Fund to include the yuan in the special drawing rights, the IMF’s reserve basket of foreign currencies.

The Xinhua news agency reported the yuan fell sharply 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 and the US dollar”.

The PBoC cited a strong dollar and sharp appreciation in the renminbi real effective exchange rate as key considerations behind the policy change.

“The PBoC said the renminbi’s central parity has deviated from its actual market rate “by a large extent and for a long duration”, which has “undermined the authority and the benchmark status” of the central parity system, Xinhua reported.

Arie Gozluklu, assistant professor of finance and a researcher into currency markets at Warwick Business School, said that, while the Chinese authorities were claiming the move was a one-off, the danger was that the current devaluation might give the wrong signal to the market, and harm Chinese efforts to internationalise the yuan.

He said the PBoC should convey to the market that the current action is not an old reflex to adjust trade balances through currency devaluation.

Flagging economy

Some believe the devaluation will increase the competitiveness of Chinese exports, giving flagging growth a lift. China’s economy is expanding at its slowest rate for six years, and could be set to slow further.

Steep falls in other emerging market currencies over the past year are slowly beginning to produce benefits for exporters in those countries.