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China’s currency reforms are a good thing
The central parity rate of the Chinese currency renminbi (yuan), weakened by 1,008 basis points to 6.3306 against the US dollar on Wednesday, authorities said.
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China’s currency extended its decline after markets were allowed to take it lower for a second day following the People’s Bank of China’s decision yesterday to depreciate the yuan and allow for more market influence in setting the daily fix.
In a statement, the Treasury Department cited progress from China, which until recently has been allowing its currency to appreciate, and said it would continue to monitor the changes Beijing announced Tuesday. “Rather than changing their ways, the Chinese government seems to be doubling down”.
The currencies of South Korea, Taiwan and Singapore are the most vulnerable to a decline in the yuan as their exporters have the highest exposure to China in Asia, according to Barclays, Standard Chartered and Mizuho Bank. Exports in July plummeted by an unexpectedly steep 8.3 per cent from a year earlier.
Copper posted a modest bounce after the overnight slide, with three-month copper on the London Metal Exchange (LME) edging up 0.7 percent to $5,159 a tonne.
The Bank of China said it will strive to further improve market-based exchange rate formation, maintain normal fluctuations and keep the rate basically stable at an adaptive and equilibrium level.
The wider band came as global crude oil prices hit new lows, while the dollar has strengthened and the Chinese yuan was devalued strongly on Tuesday, the SBV said in a statement. Emerging market currencies were generally lower.
But the Chinese central bank argued that its goals were more mundane than manipulating exports and growth. China is New Zealand’s biggest trading partner and a weaker yuan will crimp export receipts in the world’s most populous nation.
In the meantime, Ji added, the U.S. dollar “will march on”, strengthening further against Asian currencies.
“Such a surprising move by the central bank, without any previous warning, have caused some panic in the market”, said a senior currency trader at a foreign bank in Shanghai. U.S. stock indexes slumped more than 1 percent and stocks also fell in Asia and Europe as investors contemplated the implications of a move designed to support China’s slowing economy and exports. Yet the yuan has remained up anyway because of its link to the dollar, which has been rising.
Beijing has been lobbying the International Monetary Fund to include the yuan in its basket of reserve currencies known as Special Drawing Rights, which it uses to lend to sovereign borrowers.
Probably not. True, a cheaper yuan hurts U.S. exporters and likely depresses U.S. inflation, which is already below the annual 2 percent rate the Fed targets.
If the devaluation was a one-off move, economists at OCBC believe Beijing’s next step may be to widen the yuan’s allowable trading band and cut banks’ reserve requirements further to offset the impact of capital flowing out of the country.
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China’s currency move unnerved global investors Tuesday.