Currencies, Emerging Markets

Currency War Heats Up As China Devalues Yuan For Second Day In A Row

renminbiChina’s Central Bank, the People’s Bank of China (PBOC), has further devalued the yuan on Wednesday — following a surprise “one-time devaluation” announced by the Central Bank on Tuesday — which is heating up what appears to be a currency war and is thus rattling markets — sending stocks, currencies, and commodities tumbling for a second day in a row.

The PBOC weakened the yuan’s daily reference rate by 1.6 percent on Wednesday at 6.3306 per dollar — the weakest rate since October 2012, following a record 1.9 percent devaluation on Tuesday.

China announced its first devaluation on Tuesday, much to the surprise of the market, and said that it was going to strengthen market-oriented reforms in addition to increasing two-way market volatility, allowing depreciation to counter a slump in the nation’s exports.

The move sent global stocks, currencies, and commodities plunging and sent emerging market stocks falling into a bear market.

Following the second daily devaluation, on Wednesday China’s offshore yuan fell to a fresh four-year low, falling over 3 percent from Tuesday’s close.  China’s onshore yuan tumbled as much as 2 percent, following a 1.8 percent fall on Tuesday, which was the biggest one-day fall in the yuan since a massive devaluation in 1994 when China aligned its official and market rates.

China’s decision to devalue the yuan on Tuesday and shift to a more market-determined rate was condemned by U.S. lawmakers as a grab for an unfair export advantage and could set the stage for testy talks when Chinese President Xi Jinping visits Washington next month.

The move by China also sparked concerns that regional Central Banks could follow suit, as such countries are attempting to maintain their own competitiveness against China.

“It was inevitable that China would join the currency war at some point. The key will be the response of other central banks,” Nick Lawson, Managing Director at Deutsche Bank in London, told Reuters.

As such concerns grew, Vietnam became the first to follow in China’s footsteps as it widened its currency trading band on Wednesday to allow for its currency to weaken.

Vietnam’s currency can now trade as much as 2 percent on either side of a fixing set by the monetary authority, from 1 percent previously.

The Chinese yuan is facing “a vicious cycle of depreciation,” Dariusz Kowalczyk, a strategist at Credit Agricole, told Bloomberg. “At some point they’ll either abandon the implementation of the new fixing mechanism and stabilize the fixing, or they’ll intervene heavily.”

Zhang Ming, director of international investment research at the Chinese Academy of Social Sciences, told Bloomberg that if the yuan falls too quickly, the PBOC could be forced to return to its old method of setting the fixing closer to where it wants the currency to trade, which is cheaper than using foreign-exchange reserves to influence the market.

The devaluations by the PBOC come as a slowdown in China deepens, as data shows that exports fell 8.3 percent from a year earlier in July, which was well below estimates for a 1.5 percent decline.

China’s economic growth in the first quarter (Q1) of 2015 reached the slowest quarterly pace in six years at 7 percent from a year earlier, this was followed by the same growth rate in the second quarter (Q2) which beat economists’ estimates for 6.8 percent growth.

Growth has suffered in China due to a combination of an industrial slowdown, a weak housing market, and local debt, which has added to increased pressure on authorities to do more to meet Premier Li Keqiang’s 2015 growth target of “about 7 percent“.

A full-year growth rate of 7 percent would be its slowest annual rate of expansion in 25 years.


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