Sunday 27 May 2018

China devalues yuan in surprise move to tackle economic slowdown

A clerk counts Chinese Yuan bills at a post office
A clerk counts Chinese Yuan bills at a post office

China's central bank has devalued its yuan currency by nearly 2pc against the US dollar, as authorities seek to push market reforms and bolster the world's second-largest economy.

The surprise move marked the biggest drop since China reformed its currency system in 2005 by unpegging the yuan - also known as the renminbi - from the greenback.

It should make the country's exports more competitive overseas, but analysts said it could prompt anger in the US.

The People's Bank of China set its daily reference rate for the yuan at 6.2298 to $1, compared with 6.1162 yuan the previous day, effectively 1.86pc lower.

The change came amid speculation China is preparing to widen the yuan's 2pc trading band for the first time since March 2014.

The range is calculated from a central "reference rate" each day. Before Tuesday, Chinese officials said they based the fixing on a poll of market-makers, but the PBoC's move means it will now also take into account the previous day's close and other factors.

Beijing has so far kept a tight grip on the currency's value on fears major swings and volatile capital flows could present financial risk and reduce its control over the economy.

That has made the yuan far more stable than other major global currencies and a 2pc move in its value is dramatic – before Tuesday's announcement it had traded within a roughly 0.4pc band for four months.

 But China is also seeking to reform its yuan policy in an effort to have it included in the International Monetary Fund's basket of "special drawing rights" reserve currencies.

Its controls have been a stumbling block in gaining admittance to the select group, now comprised of the US dollar, Europe's euro, British pound and Japanese yen.

The Washington-based IMF said this month that "significant work" still needed to be done for the yuan to be considered before its next review in November.

"A reasonable adjustment of the RMB's value is good for China's exports and also good for the RMB to be admitted to the SDR," said Liu Dongmin, director of international finance research office at the Chinese Academy of Social Sciences.

 Exports, a key driver of the country's growth, plunged 8.3pc year-on-year in July, customs said Saturday, spelling more worry for the economy.

China's gross domestic product expanded 7.4pc in 2014 - its slowest rate since 1990 - and has slowed further this year. It grew 7.0pc in both of the first two quarters, in line with the government's annual target for 2015.

With China's economy already slowing, analysts said a weakening of the currency was long overdue.

"The RMB exchange rate deviated greatly from the market (consensus) before, so the one-off correction of 2pc today is big," said Li Daxiao, an analyst from Yingda Securities.

By midday on Tuesday, the yuan was quoted at 6.3030 to the dollar, down sharply from Monday's close of 6.2096, according to the operator of the national foreign exchange market.

But despite the potential boost to exports and economy the benchmark Shanghai Composite Index shares fell 0.40pc by the break.

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