China devalues yuan after poor economic data
China devalued its currency on Tuesday after a run of poor economic data, a move it billed as a free-market reform but which some suspect could be the beginning of a longer-term slide in the exchange rate. The central bank set its official guidance rate down nearly 2 percent to 6.2298 yuan per dollar - its lowest point in almost three years - in what it said was a change in methodology to make it more responsive to market forces. It was the biggest one-day fall since a massive devaluation in 1994 when China aligned its official and market rates.
"Since China's trade in goods continues to post relatively large surpluses, the yuan's real effective exchange rate is still relatively strong versus various global currencies, and is deviating from market expectations," the central bank said.
"Therefore, it is necessary to further improve the yuan's midpoint pricing to meet the needs of the market." The People's Bank of China (PBOC) called it a "one-off depreciation", but economists disagreed over the significance of a move that reversed a previous strong-yuan policy that aimed to boost domestic consump- tion and outward investment.
"For a long time, I gave the PBOC credit for holding the line on the renminbi (yuan) and recognising that while it might be tempting to try to shore up the oldgrowth model by devaluing the currency, that really was a dead end," said fund manager Patrick Chovanec of U.S.-based Silvercrest Asset Management. He said a strong yuan was needed to force China toward consumption and away from lowend manufacturing. "What the world needs from China is not more supply; what it needs is demand."
The devaluation followed weekend data that showed China's exports tumbled 8.3 percent in July, hit by weaker demand from Europe, the United States and Japan, and that producer prices were well into their fourth year of deflation.
The move hurt the Australian and New Zealand dollars and the Korean won, fanning talk of a round of currency devaluations from other major exporters. But some of Asia's most interventionist central banks appeared to be holding their nerve on currency policy. "I don't think the move would trigger a global currency war," a Japanese policymaker said.
Economists pointed out
until Tuesday, China had held the yuan firm while its neighbours had debased their currencies. While a weaker yuan will not cure all the ills of China's exporters, which suffer from rising labour costs and quality problems, it would help relieve deflationary pressure, a far bigger economic concern in the view of some economists.
Falling commodity prices have been blamed for producer price deflation, putting China at risk of repeating the deflationary cycle that blighted Japan for decades. Growth in China, the world's second-largest economy, has slowed markedly this year and is set to hit a 25-year low even if it meets its official 7 percent target. The devaluation hit shares in Asia and Europe. Chinese airline stocks also fell, given the impact higher fuel prices would have on their bottom line, though exporter stocks rose.
Some said the move was also to blame for a fall in futures contracts tracking the S&P 500 index, given the potential hit to U.S. exports to China. Spot yuan ended at 6.3231 on Tuesday, its weakest close since September 2012. The spot yuan is allowed to rise or fall by 2 percent from a midpoint that is set each day.