China devalues currency by 1.9 per cent

August 11, 2015 11:57 pm | Updated March 29, 2016 02:47 pm IST

The midpoint for the Yuan was fixed at 6.2295 per US dollar on Tuesday.

The midpoint for the Yuan was fixed at 6.2295 per US dollar on Tuesday.

The People’s Bank of China (PBoC), China’s central bank, decided to devalue the yuan, also known as the renminbi, by 1.9%, the largest devaluation in two decades. The midpoint for the Yuan was fixed at 6.2295 per US dollar on Tuesday, compared 6.1162 per US dollar on Monday. The PBoC termed this a one-time action, aimed at increasing the “market-orientation and benchmark status” of the currency.

The move comes after July data revealed a six-year low in the producer prices index, which was 5.4% lower on a year on year basis, and a fall in China’s exports of 8.3% year on year. Last week the International Monetary Fund (IMF) said that while the yuan was on track to be included in the basket of currencies that form the Fund’s Special Drawing Rights (SDR), it still needed to make a final determination later this year on whether the currency met the “freely usable” criterion.

China, which runs a ‘managed float’- i.e, an exchange rate that is managed against other currencies, pegs the yuan against the dollar each day. Traders are allowed to trade within a range of 2 percent (plus or minus) of this fix. So far, China has set its exchange rate without necessarily considering daily market movements, but today China announced that its daily fix will be based on the closing rate of the interbank forex market from the previous day.

The declared reason for the devaluation, analysts say, may be viewed as China’s moving towards a market determined exchange rate but the devaluation itself on the other hand, is likely to be interpreted as interference. China is heavily dependent on exports and a currency devaluation against an appreciating dollar is likely to be viewed as the government intervening to boost the economy as a reaction to the slump in exports, and a recent stock market decline.

China’s move was felt across the markets; the Australian dollar lost 1 percent to the US dollar, the euro was down 0.4 percent against the US dollar. The rupee also fell against the dollar, and was at 64.21 at 4PM IST on Tuesday, against its previous close of 63.87.

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