China’s ‘one-off’ devaluation is quickly followed by another

A day after China announced a "one-off depreciation" of the yuan's value against the dollar, the People's Bank of China stunned the world’s financial markets on Wednesday by devaluing their currency for a second consecutive day.

Chinese Yuan
Shares fell sharply across the globe with commodity prices tumbling further amid fears the latest, 1.62 per cent devaluation on top of Tuesday's 1.9 per cent cut could ignite a destabilising currency war.There has been a slew of data recently showing poor performance in China's industrial output, exports and domestic demand leading to fears that the nation's economic slide might be worse than thought.Although the latest devaluation was seen as a bid to boost Chinese exports, Rajeev De Mello, head of Asian fixed income at Schroders in Singapore, said the move "will hurt the appetite for risky assets such as equities and commodities".He added, "While it is too early to say whether this is the beginning of a sustained devaluation of the yuan, other central banks may be forced to follow suit and that may trigger a fresh round of currency weakening around the emerging world."Angus Campbell, senior analyst at FX Pro, said that, given the sharp slowdown in the Chinese economy recently, it was not surprising that the People's Bank of China (PBOC) has been "upping the ante on the monetary stimulus front".He said, "These fundamentals would cause any free-floating currency to fall in value, so it should not come as a surprise to see the devaluation occurring and further weakness could follow as China attempts to provide its exporters with a more competitive environment."This move is impacting risk assets due to the unpredictability of the PBOC's action and as it will have a knock on deflationary impact for China's big trading partners."But in a note on Wednesday, Capital Economics rejected the idea that China was declaring a "currency war".The note said, "A second downward adjustment to the renminbi (yuan) reference rate today suggests that policymakers are now more willing to give in to market forces than we had previously thought."That said, we still think the changes to the reference rate primarily reflect efforts to push ahead with financial reform rather than a concerted policy move to devalue the currency."Indeed, the latest devaluation was welcomed by the IMF as a step towards greater exchange rate flexibility, suggesting it could be helpful towards Beijing achieving its long-held ambition of having the yuan included in its currency basket."The new mechanism for determining the central parity of the renminbi announced by the PBOC appears a welcome step as it should allow market forces to have a greater role in determining the exchange rate. The exact impact will depend on how the new mechanism is implemented in practice."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."We believe that China can, and should, aim to achieve an effectively floating exchange rate system within two to three years."For more Re:locate news and features about China's economy, click here

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