China devalued its tightly controlled currency on Tuesday following a slump in trade, triggering the yuan’s…
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Tuesday’s change presents a dilemma for U.S. policymakers who have often accused China of manipulating the yuan for a trade advantage.
As the names suggests, onshore (CNY) yuan is traded on the mainland, while offshore (CNH) is traded through the Bank of China in Hong Kong and available to be bought and sold by global investors.
Interest rate reductions and monetary easing were insufficient to revive the economic slowdown in China.
Republican presidential candidate Donald Trump on Tuesday said China’s devaluation of the yuan would be “devastating” for the United States.
How does China’s currency work?
Initiatives by Japan and the European Union over the past two years depressed the yen and euro.
“The cut definitely helps exports”, said Yu Mingliang, the director of business development at Zhejiang Lianda Forging & Press Co., a private manufacturer of mechanical parts and other goods in the eastern city of Wenzhou.
The yuan has strengthened in recent months along with the dollar, making Chinese exports more expensive and raising the risk of politically risky job losses in industries that employ millions of workers.
On the weekend, China reported a surprisingly heavy fall in exports and a unbroken slide in producer costs to a close to six-year low in July.
Tuesday’s move “signals a new government willingness” to let the currency decline, said USB economist Tao Wang in a report.
FILE – In this March 15, 2012 file photo, a Chinese woman poses for photos near a sculpture depicting a Chinese yuan note at an art district in Beijing, China.
Beijing is likely to move cautiously but market expectations of more depreciation “could quickly become entrenched” and cause the yuan to “depreciate quite quickly and significantly”, said Wang.
Like the majority of China’s markets, its government largely controls its currency movements, and unlike floating exchange rate currencies which are determined by market forces (supply and demand), its currency moves as a crawling peg to the US dollar.
The yuan, also known as the renminbi, is allowed to fluctuate in a band 2 percent above or below a rate set each day by the People’s Bank of China based on the previous day’s trading.
The bank set the value of yuan at 6.2298 a dollar, 1.9% lower than Monday’s official fixing rate. The yuan quickly fell 1.3 percent against the dollar and was down nearly 1.9 percent at midday.
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“For a long time, I gave the PBOC credit for holding the line on the renminbi (yuan) and recognizing that while it might be tempting to try to shore up the old-growth model by devaluing the currency, that really was a dead end”, said fund manager Patrick Chovanec of U.S.-based Silvercrest Asset Management. But he said a weaker yuan “could be ultimately positive for Asia” if it helps to revive Chinese demand for imports.
