Currencies, Emerging Markets

Currency War Intensifies As China Devalues Yuan For Third Day In A Row

China’s Central Bank, the People’s Bank of China (PBOC), has further devalued the yuan on Thursday for a third day in a row — following a surprise “one-time devaluation” announced by the Central Bank on Tuesday — which is heating up what appears to be a currency war that is continuing to rattle markets.

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 On Thursday, the PBOC set the yuan’s daily reference rate at 6.4010 per dollar prior to market open, which is weaker than the previous fix of 6.3306, a devaluation of 1.1 percent, and a sign that the Central Bank may be looking to allow the yuan to depreciate in more of a measured way.

The PBOC has now devalued the yuan rate by at least 4.6 percent, sending it back to July 2011 lows, following a 1.9 percent devaluation on Tuesday and a 1.6 percent devaluation on Wednesday.

China announced its plan to devalue the nation’s currency 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.

China’s decision to devalue its currency sparked fears of a global currency war as U.S. lawmakers said that Beijing was unfairly supporting its exporters.  The decision will also set the stage for what will likely be testy talks when Chinese President Xi Jinping visits Washington next month.

Following the PBOC’s initial move, global stocks, currencies, and commodities were sent plunging and emerging market stocks fell into a bear market.

On Wednesday China devalued its currency for the second day in a row which sent the offshore yuan falling to a fresh four-year low as it had fallen as much as over 3 percent from Tuesday’s close.  China’s onshore yuan tumbled nearly 2 percent before PBOC intervention, 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.

The PBOC on Wednesday reassured jittery global financial markets that it was not looking to embark on a steady depreciation path.

Reuters, however, cited sources involved in China’s policy-making decisions that said that “powerful voices within government were pushing for the yuan to go still lower, suggesting pressure for an overall devaluation of almost 10 percent.

In a rare move by the PBOC, officials addressed media in Beijing on Thursday for a briefing, and again looked to reassure markets by sticking to their message that the exchange rate will become more market driven while insisting that the Central Bank has the ability to keep the market in check with China’s ample foreign-exchange reserves.

China’s onshore yuan spot rate fell by 0.3 percent as of 10:43 AM in Shanghai on Thursday after the third day of devaluation, following two-day losses of 2.8 percent.

There is a “managed devaluation” under way and intervention risk remains high, Christy Tan, National Australia Bank’s head of markets strategy for Asia, told Bloomberg. “I think they are committed to closing the gap between the fix and market levels. As for where market levels are, it may from time to time be influenced by non-market forces, especially when volatility is high.”

“It’s likely the worst is over,” Patrick Bennett, a strategist at Canadian Imperial Bank of Commerce in Hong Kong, told Bloomberg. “PBOC intervention has calmed the market. There is not a sense that the onshore yuan will weaken forever.”

Mohamed El-Erian, the ex-CEO and co-Chief Investment Officer at PIMCO, and now Chief Economic Adviser at Allianz SE, told Business Insider that China’s currency policy decision is the right structural step for the country over the medium-term (and eventually for the global economy); but, also important and more immediate for financial markets, it is occurring at the wrong cyclical time for a world that is struggling mightily to generate sufficient high-quality growth.

El-Erian in a recent Bloomberg opinion editorial said:

The timing of China’s policy decision signals that one of the largest and most systemically important economies is no longer in a position to play its longstanding role as a locomotive of global growth. The tailwind China has provided other countries now risks becoming a headwind.

The timing of China’s policy decision signals that one of the largest and most systemically important economies is no longer in a position to play its longstanding role as a locomotive of global growth. The tailwind China has provided other countries now risks becoming a headwind.

Marc Faber, Editor and Publisher of The Gloom, Boom & Doom Report, recently told India’s Economic Times that the yuan would “easily” weaken from its recent peak by about 10 percent and that “a 2 percent devaluation or even a 10 percent or a 20 percent devaluation was not going to help China in terms of exports”.

But as China continues to devalue its currency, fears are growing that other regional Central Banks could follow suit with their own currency devaluations, 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.

And 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.

Discussion

16 thoughts on “Currency War Intensifies As China Devalues Yuan For Third Day In A Row

  1. Reducing the value of the Chinese currency raised many questions and fears in a country considered one of the main engines of the global economy. It is no different to what China did, so why did the devaluation of the yuan reverberate around the globe in the way it did?

    Like

    Posted by Hong Bosefski | August 31, 2015, 3:09 pm

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