Chinese yuan devalued for second time within 24 hours

12 August 2015

The Chinese currency, the yuan, weakened further 1.6 per cent today against the US dollar hitting a four-year low following a surprise devaluation of the currency yesterday by the People's Bank of China (PBOC).

The central bank yesterday devalued the yuan by 1.9 per cent against the dollar, aiming to provide a boost to the country's struggling exporters (See: China devalues yuan to boost sagging exports).

The bank also changed the way yuan's daily trading range is computed, which now will be based on the previous day's closing price rather than the earlier central bank set value.

The move triggered a major sell off on Wall Street, for fear of a looming global currency war.

Yuan fell to 6.43 per dollar from 6.33 yesterday, its weakest level since August 2011.

The central bank said that the devaluation is a one-off step to make the currency more responsive to market forces.

"The reform of exchange rate formation mechanism will continue to be pushed forward with a market orientation. The will play a bigger role in exchange rate determination to facilitate the balancing of international payments," the BPOC said in a statement yesterday.

''Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan,'' the bank said.

The US treasury, which has been cautiously watching the Chinese currency movement, said it is too early to judge the implications of the devaluation.

''While it is too early to judge the full implications of the change in the PBOC reference rate, China has indicated that the changes announced today are another step in its move to a more market-determined exchange rate,'' a US treasury spokesperson said yesterday.

The US has long alleged that China has been manipulating its currency to promote its exports, as a weak currency makes the products cheaper in the international market.

If other nations in the region also resort to devaluation of their currencies in retaliation, that could lead to a full-fledged currency war.

''It is remains critical that China pursue policies that reflect its stated desire to move towards an economy driven primarily by household demand rather than exports, which is in China and America's best interests. Any reversal in reforms would be a troubling development,'' the US treasury said.

The Chinese economy is expected to grow less than seven per cent this year, its slowest pace since 1990.

Exports have plunged over 8 per cent in July compared to a year ago. And the country's stock market had a free fall since June, with the Shenzen stock index falling nearly 30 per cent to 2,249 on Wednesday.

Earlier in 1994, China had devalued its currency by about a third, by integrating the official exchange rate and currency swap rate, when the country was suffering from economic slowdown and dwindling exports.

 search domain-b