China de­val­ues yuan af­ter poor eco­nomic data

The Pak Banker - - FRONT PAGE -

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

that

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.

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