In other words: China has officially entered the currency wars.
China devalued the yuan by the most in two decades, a move that rippled through global markets as policy makers stepped up efforts to support exporters and boost the role of market pricing in Asia’s largest economy.
The central bank cut its daily reference rate by 1.9 percent, triggering the yuan’s biggest one-day drop since China unified official and market exchange rates in January 1994. The People’s Bank of China called the change a one-time adjustment and said it will strengthen the market’s ability to determine the daily fixing.
Chinese authorities had been propping up the yuan to deter capital outflows, protect foreign-currency borrowers and make a case for official reserve status at the International Monetary Fund. Tuesday’s announcement suggests policy makers are now placing a greater emphasis on efforts to combat the deepest economic slowdown since 1990 and reduce the government’s grip on the financial system.“It looks like this is the end of the fixing as we know it,” said Khoon Goh, a Singapore-based strategist at Australia & New Zealand Banking Group Ltd. “The one-off devaluation of the fix and allowing more market-based determination takes us into a new currency regime.”
The yuan dropped 1.8 percent to 6.32 per dollar as of 1:34 p.m. in Shanghai. It slid 2.3 percent in Hong Kong’s offshore trading. The onshore spot rate was 1.4 percent weaker than the reference rate of 6.2298, within the 2 percent limit allowed by the central bank.
The devaluation jolted global markets, with the currencies of South Korea, Australia and Singapore falling more than 1 percent amid bets other countries may seek weaker exchange rates to keep exports competitive. Shares of Chinese airlines sank on concern their dollar debt costs will rise, while commodities retreated amid speculation yuan weakness will erode the buying power of Chinese consumers. U.S. Treasuries gained on growing demand for dollar assets.
China’s intervention in the currency market had contributed to a $300 billion slide in the nation’s foreign-exchange reserves over the last four quarters. It made the yuan the best performer in emerging markets, fueling an 8.3 percent slide in exports last month.
China’s move has raised the risk of a “currency war” as export rivals seek a weaker exchange rate to stay competitive, according to Stephen Roach, a senior fellow at Yale University and former non-executive chairman for Morgan Stanley in Asia.
“It’s hard to believe this will be a one-off adjustment,” Roach said. “In a weak global economy, it will take a lot more than a 1.9 percent devaluation to jump-start sagging Chinese exports. That raises the distinct possibility of a new and increasingly destabilizing skirmish in the ever-widening global currency war. The race to the bottom just became a good deal more treacherous.”
Full article: China Rattles Markets With Yuan Devaluation (Bloomberg)