China has cut the value of its currency by two percent with the yuan now standing at its lowest rate against the dollar in close to three years and its biggest drop since 1994.
The People’s Bank of China said it was a “one-off” depreciation and is intended to make the currency a more reflective value of market forces. This is not a competitive devaluation and would have at best minor effect in making Chinese exports cheaper.
Jonathan Anderson, at Emerging Advisors Group, wrote Tuesday “all China is doing today is managing the pace of trade-weighted renminbi appreciation,” Anderson continued. “Any attempt to gain truly meaningful competitiveness vis-à-vis trading partners would require, say, a 20 percent to 40 percent devaluation against the dollar.”
The central bank said it would lessen its intervention in the yuan’s daily position with more of a role current market prices. The devaluation puts the yuan more into line with recent market prices and reverses a slight bias toward a more valued currency.
“If this move ushers in a new era where the CNY [Chinese yuan] fixing is increasingly reflective of the spot market, it could be positive for its prospects being included in the IMF’s special drawing rights basket of currencies this year,” Angus Nicholson, market analyst with trading firm IG wrote in a research note.
China’s economy has been in a slowdown mode for the better part of a year. The situation worsened after the Chinese stock market crashed in July with Goldman Sachs citing an unattractive risk/reward profile, strong government intervention in the stock market and poor manufacturing data.
China is desperate to maintain a growth rate of seven percent or higher and maintain strong exports. But a key objective of Chinese monetary policy that could be in conflict with these aims is a strong currency with influence on global trade. China is keen to join the IMF’s reserve currency currently dominated by the dollar, euro and yen.
The problem for China has been having to maintain its currency within a strict range close to the dollar. The dollar has risen 8.7 percent since December, dragging the yuan upwards. China’s economic circumstances are wildly different from those of the U.S. and the devaluation gives a degree of flexibility.
In the long run, China wants the yuan to be on the same influential level as the dollar and the euro. However, domestic restrictions prevent it from playing this role.
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