Wed, Aug 12, 2015 - Page 1 News List

China devalues yuan after poor economic data


A clerk moves bundles of 100-yuan banknotes to a safe at the headquarters of the Korea Exchange Bank in Seoul yesterday.

Photo: EPA

China devalued its currency yesterday after a run of poor economic data, a move it billed as a free market reform, but which some suspect could be the beginning of a longer-term slide in the exchange rate.

China’s central bank set its official guidance rate down 1.9 percent to 6.2298 yuan per US dollar — its lowest point in almost three years — in what it said was a change in methodology to make it more responsive to market forces.

It was the biggest one-day fall since a massive devaluation in 1994, when China aligned its official and market rates.

“Since China’s trade in goods continues to post relatively large surpluses, the yuan’s real effective exchange rate is still relatively strong versus various global currencies, and is deviating from market expectations,” the People’s Bank of China (PBOC) said.

“Therefore, it is necessary to further improve the yuan’s midpoint pricing to meet the needs of the market,” it said.

The PBOC called it a “one-off depreciation,” but economists disagreed over the significance of a move that reversed a previous strong-yuan policy that aimed to boost domestic consumption and outward investment.

“For a long time, I gave the PBOC credit for holding the line on the renminbi [yuan] and recognizing that while it might be tempting to try to shore up the old-growth model by devaluing the currency, that really was a dead end,” fund manager Patrick Chovanec of US-based Silvercrest Asset Management said.

He said a strong yuan was needed to force China toward consumption and away from low-end manufacturing.

The devaluation followed weekend data that showed China’s exports tumbled 8.3 percent last month, hit by weaker demand from Europe, the US and Japan, and that producer prices were well into their fourth year of deflation.

The move hurt the Australian and New Zealand dollars and the South Korean won, fanning talk of a round of currency devaluations from other major exporters. However, some of Asia’s most interventionist central banks appeared to be holding their nerve on currency policy.

“I don’t think the move would trigger a global currency war,” a Japanese policymaker said.

Economists said that until yesterday, China had held the yuan firm, while its neighbors had debased their currencies.

While a weaker yuan will not cure all the ills of China’s exporters, which suffer from rising labor costs and quality problems, it would help relieve deflationary pressure, a far bigger economic concern in the view of some economists.

Falling commodity prices have been blamed for producer price deflation, putting China at risk of repeating the deflationary cycle that blighted Japan for decades.

Growth in China, the world’s second-largest economy, has slowed markedly this year and is set to hit a 25-year low even if it meets its official 7 percent target.

The devaluation hit shares in Asia and Europe. Chinese airline stocks also fell, given the impact higher fuel prices would have on their bottom line, though exporter stocks rose.

The spot yuan ended at 6.3231 versus the US dollar yesterday, its weakest close since September 2012. The spot yuan is allowed to rise or fall by 2 percent from a midpoint that is set each day.

In the past, the central bank set the midpoint by a formula based on a basket of currencies, but the methodology was never publicized and many believed the midpoint was frequently used as a way to bend the market to policy goals.

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