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China devaluating Yuan, allowing it to hit new lows

China’s yuan fell to four-year low on Wednesday, marking the biggest two-day decline, a day after the People’s Bank of China devalued its tightly controlled currency to support the tumbling Chinese economy. The yuan slid by another 1 percent after Tuesday’s record 1.9 percent devaluation, sparking the biggest two-day fall against the U.S. dollar in decades. The move by China’s central bank points to a great level of concern served to the world’s second largest economy as the market continues to sputter. Chinese authorities said the currency’s intervention would help drive the yuan toward more market-driven movements, however, investors feared the deflationary pressures of a slowdown in China. But the central bank, which had described the devaluation as a one-off step to make the yuan more responsive to market forces, has sought to calm fears saying that the decision was not the start of a steady depreciation.

The sharp decline sent fresh shockwaves through Asian markets, especially the international currencies that compete with yuan, with Malaysian ringgit and Philippine peso hitting fresh multiyear lows and stock in Japan and Hong Kong falling nearly 1 percent. The Chinese yuan fell 1.6 percent against the dollar after the central bank sets its daily fixing rate to the U.S. dollar down 1.6 percent on Wednesday from Tuesday’s rate. In daily trading, the yuan is allowed to move 2 percent above or below around the bank’s daily fixing. The move came after China lowered its currency’s fixing by 1.9 percent on Tuesday, leaving it at 6.2298 to the U.S. dollar from 6.1162 on Monday. The yuan fell to as close as 1.99 percent from its previous close to 6.3360 against the dollar in Shanghai and dropped as much as 2.3 percent in Hong Kong in early trading. The Shanghai Composite Index lost 1 percent to 3,886.32.

On the off-shore markets, where the trading isn’t restricted by a daily 2 percent band, the yuan weakened 1.8 percent to 6.5, the steepest drop in four-and-a-half years. The New Zealand dollar has taken a further hit after the surprise second-day fall, pushing the kiwi dollar below 0.5 percent against the U.S. dollar in afternoon trading on Wednesday. The South Korean won took the hard hit in Asia, after it fell another 1 percent to trade at 1,189 against the U.S. dollar. The Chinese devaluation also knocked down the Australian dollar and Australian shares, which fell to a seven month low. The market slowdown had sparked fears of a global and destabilizing currency war. There has been criticism from the United States, where markets fell sharply overnight. Washington has already implicated China in the past for using its currency for competitive advantage.

The decision of the People’s Bank of China will likely to have global ramifications, in the short and long term, considering it already accentuated the risks over the health of China’s economy. By devaluating yuan, China made its home-made goods cheaper to buy and in comparison the goods made in other countries more expensive. This means that consumer companies are more likely to buy from China than other countries. Bill McQuaker, co-head of the multi-asset team at Henderson Global Investors summed it up perfectly saying that what is good for China is unfortunately bad for everyone else.

Last weekend, data showed an 8.3 percent drop in exports in July, adding to concerns that the country’s economy is heading for a slowdown. The International Monetary Fund (IMF) said the move to make the yuan more market-based appeared to be a welcome step and that the decision would not affect its consideration of Beijing’s hopes for the yuan to be included in its basket of reserve currencies known as Special Drawing Rights, which the organization uses to value reserve assets. This would raise China’s influence on the global market, making it easier for companies to trade in the Chinese currency.

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