Market unease over China’s surprise devaluation

China devalued the yuan by almost two per cent against the dollar on Tuesday in a bid to reverse an economic slowdown that has produced a stock market slump.

Chinese Yuan and US dollar
The move, which took markets across the world by surprise, "could raise geopolitical tensions and weigh on growth elsewhere", according to the New York Times.In a statement, the People's Bank of China said the devaluation was intended to bring the yuan more in line with the international market.However, few doubt that it was triggered by a desire to boost the economy, especially the export sector which, according to official figures released at the weekend, was 8.3 per cent down in July on a year earlier. The producer price index is also hovering near a six-year low."The most immediate effect is that it signals to the world that Beijing thinks the Chinese economy is sputtering," commented the Wall Street Journal. "The move suggests China is looking for ways to get it going again."But it also has major implications for the US and other countries that trade with China because it puts their companies at a disadvantage. In the US, it will likely reignite criticism that Beijing keeps the currency artificially low to help its own manufacturers."The newspaper said the devaluation also puts pressure on other central banks around the world to push down their own currencies to help their own exporters remain competitive and to prevent destabilising capital flows.It added, "The move could hurt commodities markets because it signals potential weak demand from China. It could also accelerate capital outflows out of China, especially if investors expect further devaluations."The central bank, however, insisted the 1.9 per cent devaluation against the dollar – reducing the yuan to its lowest rate in almost three years – was a "one-off depreciation".Analysts, though, questioned this. Angus Nicholson, market analyst with trading firm ING, said, "The question on everyone's mind is whether this is the awakening of the dragon, ushering in a new global currency war."If this move ushers in a new era where the CNY (Chinese yuan) fixing is increasingly reflective of the spot market, it could be positive for its prospects being included in the IMF's special drawing rights basket of currencies this year."HSBC analysts wrote in a note, "While China's policy makers have long suggested that foreign exchange reforms would happen, the abrupt nature of today's announcement has injected considerable volatility into the renminbi (yuan) and other Asian currencies."Robert Peston, the BBC's economics editor, commented, "The decision of the People's Bank of China to devalue the yuan by 1.9 per cent will have global ramifications, in the short, medium and long-ish term."Immediately it will increase the competitiveness of China's exports at a time when the country's economy is growing at its slowest rate for six years – and when many economists fear that the slowdown will become much more painful and acute."And for all the spur to growth it may give, the devaluation will reawaken concerns that Beijing is still a million miles from having re-engineered the Chinese economy to deliver more balanced growth based on stronger domestic consumer demand."For more Re:locate news and features about China, click here

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