Bei­jing cuts yuan rate against US dol­lar for 2nd straight day

The China Post - - FRONT PAGE - BY BILL SAVADOVE

China cut the yuan’s value against the U. S. dol­lar for the sec­ond con­sec­u­tive day Wed­nes­day, roil­ing global fi­nan­cial mar­kets and driv­ing ex­pec­ta­tions the cur­rency could be set for fur­ther falls.

The daily ref­er­ence rate that sets the value of the Chi­nese cur­rency against the green­back was cut by 1.62 per­cent to 6.3306 yuan, from 6.2298 on Tues­day, the Peo­ple’s Bank of China (PBOC) said in a state­ment on its web­site.

The move took the re­duc­tions to 3.5 per­cent this week — the largest in more than two decades — af­ter a sur­prise de­val­u­a­tion on Tues­day, but the cen­tral bank played down ex­pec­ta­tions it would con­tinue to de­pre­ci­ate the cur­rency.

The com­bined drop is the big­gest since China set up its mod­ern for­eign ex­change sys­tem in 1994, when it de­val­ued the yuan by 33 per­cent at a stroke.

It is also a big­ger change than the 2.1 per­cent rise when China un­pegged the yuan, also known as the ren­minbi ( RMB), from the dol­lar in 2005.

The dou­ble move has been widely viewed as a way to boost China’s ex­ports by mak­ing them more com­pet­i­tive as growth slows.

Com­pound­ing con­cerns over the world’s sec­ond- largest econ­omy, three key in­di­ca­tors re­leased on Wed­nes­day all came in be­low mar­ket ex­pec­ta­tions, the latest data to show weak­ness.

China says it is mak­ing its ex­change rate sys­tem more mar­ket-ori­ented, but some an­a­lysts sus­pect it could be the start of a longer slide in the yuan and SG Global Eco­nom­ics pre­dicted the unit could de­pre­ci­ate by five per­cent over 12 months.

The cuts have al­ready jolted global share and com­mod­ity mar­kets and Asia-Pa­cific cur­ren­cies have suf­fered as in­vestors fret over the im­pact on economies closely tied to the Asian gi­ant.

Cur­rency War

An­a­lysts said the move could also de­lay an ex­pected U. S. hike in in­ter­est rates and even threaten a cur­rency war as other coun­tries come un­der pres­sure to de­value as well.

Washington has long crit­i­cized China’s rigid cur­rency regime, with of­fi­cials de­scrib­ing the yuan as un­der­val­ued, but the U.S. of­fered a mild re­sponse, say­ing it was too early to judge the changes.

“China has in­di­cated that the changes an­nounced to­day are another step in its move to a more mar­ket- de­ter­mined ex­change rate,” the U.S. Trea­sury said, adding: “Any re­ver­sal in re­forms would be a trou­bling de­vel­op­ment.”

Pre­vi­ously, Chi­nese author­i­ties based the fix­ing on a poll of mar­ket-mak­ers, but the PBOC said Tues­day they will now also take into ac­count the pre­vi­ous day’s close, for­eign ex­change sup­ply and de­mand and the rates of ma­jor cur­ren­cies.

Wed­nes­day’s fix was even lower than Tues­day’s close of 6.3232 yuan to the dol­lar. The unit closed at 6.3870, weak­en­ing from a day be­fore but trim­ming losses from ear­lier, and Bloomberg News re­ported that the cen­tral bank had in­ter­vened to buy dol­lars and prop it up.

The new fix­ing mech­a­nism still gives of­fi­cials some dis­cre­tion in set­ting the rate, so that it will not au­to­mat­i­cally fol­low the mar­ket.

China al­lows the yuan to trade only within a two per­cent range on ei­ther side of the daily ref­er­ence rate, although the State Coun­cil, or cab­i­net, has sig­naled it in­tends to widen the band.

The cen­tral bank is ex­pected to de­fend the cur­rency should it test the lim­its.

The PBOC also dis­missed ex­pec­ta­tions of con­tin­ued falls, say­ing in a state­ment the ex- change rate move­ments were nor­mal and “there is no base for con­tin­ued de­pre­ci­a­tion.”

Sen­ti­ment Hurt

But global mar­kets con­tin­ued their slide, with Hong Kong stocks clos­ing down 2.38 per­cent on Wed­nes­day and Tokyo los­ing 1.58 per­cent, while oil dropped af­ter hit­ting a more than six-year low in New York.

Shang­hai shares closed down 1.06 per­cent as worse- thanex­pected eco­nomic fig­ures also hurt sen­ti­ment.

In­dus­trial out­put grew 6.0 per­cent year-on-year in July, the gov­ern­ment said, slow­ing from a 6.8 per­cent in­crease in June and com­ing in be­low ex­pec­ta­tions for a 6.6 per­cent rise, while re­tail sales and fixed as­set in­vest­ment also dis­ap­pointed.

The yuan cuts also come as Bei­jing seeks to have the yuan in­cluded in the In­ter­na­tional Mon­e­tary Fund’s bas­ket of “spe­cial draw­ing rights” (SDR) re­serve cur­ren­cies.

The IMF has said more work was re­quired on the pro­posal, but a spokesman wel­comed Tues­day’s changes, say­ing they should give mar­ket forces “a greater role in de­ter­min­ing the ex­change rate.”

“Greater ex­change rate flex­i­bil­ity is im­por­tant for China as it strives to give mar­ket forces a decisive role in the econ­omy and is rapidly in­te­grat­ing into global fi­nan­cial mar­kets,” the spokesman added.

“The ex­act im­pact will de­pend on how the new mech­a­nism is im­ple­mented in prac­tice.”

AP

In this Tues­day, Aug. 11 photo, a bank clerk counts Chi­nese cur­rency notes at a bank out­let in Huaibei in cen­tral China’s An­hui province.

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