China devalues the yuan

China’s currency, the yuan renminbi, fell by 1.9% against the dollar on Tuesday, the biggest move since the current currency regime was introduced two decades ago, as the People’s Bank of China (PBOC) devalued the currency. It slid by another 1.6% the next day.

The Chinese central bank has effectively been keeping the yuan pegged to the dollar, setting a fixed rate every day and allowing it to trade within 2% on either side of that rate. But on Tuesday it moved the fix by 1.9% and said in future that it would base the fix on the previous day’s market rate rather than its own judgement. As a result, the yuan fell by a further 1.6% on Wednesday.

What the commentators said

There are two ways of looking at this, said Nils Pratley in The Guardian. Beijing “is obsessed with the idea” of the yuan becoming one of the International Monetary Fund’s (IMF) reserve currencies, along with the euro, the yen, and the dollar. A more flexible, market-orientated exchange rate is likely to impress the IMF, facilitating the integration of China into the global financial system.

On the other hand, continued Pratley, the Chinese economy may be even weaker than the official data, “which nobody trusts anyway”. So the government may be trying to boost exporters through currency devaluation, making Chinese goods cheaper for overseas buyers.

That could spark a currency war in the region. As emerging market currencies slide, exporting “waves of deflation to the West”, said Albert Edwards of Societe Generale, they will overwhelm lacklustre developed world profitability, taking us back to “outright recession”.

Don’t panic yet, said James Mackintosh in the Financial Times. For one thing, the yuan has been very strong in the round: since last summer it has climbed by 20% against the euro and the yen; in real trade-weighted terms, it is up by 17% since early 2014. So you can see why the government wants to weaken it.

On the other hand, as far as a devaluation is concerned, a big one-off move of, say, 20%, would make more sense than a series of little steps.

For now, it seems Beijing is killing two birds with one stone. It’s allowing market forces more influence over the currency, which, given weak recent data, “conveniently… means a weaker” yuan.

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