Markets

China devalues yuan again, sending shock waves and mixed signals

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

Following Tuesday’s 1.9 % >devaluation of its currency, China lowered its “daily fix” of the yuan to 6.3306 per US dollar, a further decline of 1.6%. The yuan is allowed to trade at plus or minus 2 percent around this midpoint. Wednesday’s move pushed the yuan down by another 1.4 percent to 6.4151 in onshore markets. Markets have been rife with rumours about China wanting to exacerbate a currency war.

Wednesday’s move comes after Ma Jun, Central bank economist said via the People’s Daily, the official newspaper of the Chinese Communist Party that Tuesday’s 1.9% devaluation of the yuan by China should be seen as a one-off move to enhance the currency’s market orientation, and should not be read as the beginning of a devaluation trend. The People’s Bank of China (PBoC), on Tuesday had lowered the yuan’s ‘daily fix’ by 1.9%, sending ripples across the globe, both in terms of exchange rate and market movements and in terms of discussion and speculation about China’s motives for the decision.

Mr Jun’s comment should allay some fears of the United States, which reacted cautiously to China’s move on Tuesday. “While it is too early to judge the full implications of the change…China has indicated that the changes announced today are another step in its move to a more market-determined exchange rate,” Reuters quoted a U.S Treasury official as saying on Tuesday.

However, Wednesday’s second devaluation will not allay those fears and is likely to bolster the view that this is the beginning of a sustained devaluation.

Global opinion on China’s devaluation move included the view that it was done to further the country’s goal of having the yuan included in the IMF’s reserve currency asset, Special Drawing Rights (SDR), though some commentators and economists saw it more as a move to give China’s flagging exports a boost.

“We believe that China can, and should, aim to achieve an effectively floating exchange rate system within two to three years,” the International Monetary Fund (IMF) said in an official statement about Tuesday’s devaluation, adding, “ … a more market-determined exchange rate would facilitate SDR operations in case the Renminbi [yuan] were included in the currency basket going forward.”

Wednesday’s yuan devaluation sent shock waves through the markets; the rupee fell to a two year low of 64.92 against the dollar, the Australian dollar fell to a six-year low, the Nikkei (Japan) fell 1.6% to a two-week low, South Korea’s Kospi dropped 0.6% and Hong Kong’s Hang Seng fell 2.4%. On Tuesday, U.S stocks slid, as the Dow Jones Industrial Average lost 1.2 percent and the Nasdaq Composite Index lost 1.27 %.

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Printable version | Oct 23, 2020 9:24:01 AM | https://www.thehindu.com/business/markets/china-devalues-yuan-again-sending-shock-waves-and-mixed-signals/article7531402.ece

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