China cuts yuan rate against dollar for second day

Shanghai, August 12

China cut the yuan’s value against the dollar for the second consecutive day today, roiling global financial markets and driving expectations the currency could be set for further falls.

The daily reference rate that sets the value of the Chinese currency against the greenback was cut by 1.62 per cent to 6.3306 yuan, from 6.2298 on Tuesday, the People’s Bank of China (PBoC) said in a statement on its website.

The move took the reductions to 3.5 per cent this week — the largest in more than two decades — after a surprise devaluation on Tuesday, but the central bank played down expectations it would continue to depreciate yuan.

The combined drop is the biggest since China set up its modern foreign exchange system in 1994, when it devalued the yuan by 33 per cent at a stroke.

It is also a bigger change than the 2.1 per cent rise when China unpegged the yuan, also known as the renminbi (RMB), from dollar in 2005.

The move has been widely viewed as a way to boost China’s exports by making them more competitive as growth slows. Compounding concerns, three key indicators released today all came in below market expectations, the latest data to show weakness in the world’s second-largest economy.

China says it is making its exchange rate system more market-oriented, but some analysts suspect this could be start of a longer slide in yuan and SG Global Economics predicted it could depreciate by five per cent over 12 months.

The cuts have already jolted global share and commodity markets and Asia-Pacific currencies have suffered as investors fret over the impact on economies closely tied to the Asian giant.

Analysts said the move could also delay expected moves by the United States to raise interest rates and even threaten a currency war as other countries come under pressure to devalue as well.

Washington has long criticised China’s rigid currency regime, with officials describing the yuan as undervalued, but the US offered a mild response, saying it was too early to judge the changes.

“China has indicated that the changes announced today are another step in its move to a more market-determined exchange rate,” the US Treasury said, adding: “Any reversal in reforms would be a troubling development”.

Previously, Chinese authorities based the fixing on a poll of market-makers, but the PBoC said on Tuesday they will now also take into account the previous day’s close, foreign exchange supply and demand and the rates of major currencies.

Today’s fix was even lower than Tuesday’s close of 6.3232 yuan to the dollar, and the unit weakened further to 6.4451 in domestic trade during the afternoon.

But the new mechanism still gives officials some discretion in setting the rate, so that it will not automatically follow the market.

China allows the yuan to trade only within a two per cent range on either side of the daily reference rate, although the State Council, or Cabinet, has signalled it intends to widen the band.

The central bank is expected to defend the currency should it test the limits, and Bloomberg News reported today that the bank intervened in to stem the yuan’s losses.

The PBoC also dismissed expectations of continued falls, saying in a statement the exchange rate movements were normal and ‘there is no base for continued depreciation’.

IMF welcomes mechanism

WASHINGTON: The International Monetary Fund (IMF) welcomed Beijing’s newly announced system to value the country’s currency, saying it will allow market forces to play a greater role in the nation. The IMF said the step could be a boon in the long run. “The new mechanism for determining the central parity of the renminbi (yuan) announced by the PBoC appears a welcome step as it should allow market forces to have a greater role in determining the exchange rate,” an IMF spokesman said in a statement.