But the Chinese government normally keeps its currency’s value pegged to the U.S. dollar, so the surprise drop set off a wave of selling in global stock markets. The devaluation triggered selling of copper and other commodities on expectations of waning demand from Chinese buyers.
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However, others say Beijing’s move is less about exports and more about further de-pegging the yuan from the greenback, a shift that would also have global implications.
China’s action could make the US Federal Reserve delay a long-anticipated interest rate hike in September, as officials will be wary about doing anything that strengthens the dollar further right now. That gesture could strengthen Beijing’s argument to the IMF that its currency meets conditions for being a transparent and reliable medium for worldwide trade.
The devaluation of the yuan could help stimulate China’s declining export industry and boost the country’s economic growth slump.
However, the cuts were accompanied by measures to ease controls over the currency to allow it to float more freely. “Now that this Rubicon has been crossed, keen attention should be paid to any other significant moves to prop up the Chinese economy”, Angus Nicholson, a market analyst at IG, said in a commentary. At present, this only includes the dollar, the pound, the yen and the euro. BMW is yet another company to issue a warning about the impact of a Chinese slowdown.
Companies with heavy exposure to China, including luxury goods makers and automakers, suffered the biggest blows in European trading.
This is a blow for oil-producing countries, but even though the UK is home to oil giants BP and Shell, a lower price will be welcomed by drivers paying less at the petrol pumps.
Analysts at BMI Finance Ltd in Hong Kong downgraded their year-end forecasts for the currency to 6.83, down 10 percent from pre-devaluation levels.
“There is a great deal of nervousness around emerging markets now that the general economic environment has been less favorable for them”, Alan Gayle, senior strategist for Atlanta-based Ridgeworth Investments, said by phone.
A full-blown currency war is not yet on the cards, although considering the vast quantitative easing programmes launched since the financial crisis – with each having the side effect of dampening the local currency – many would argue that surreptitious skirmishing has been ongoing for years.
A full-on depreciation would trigger an outcry in the US Congress as the presidential election season heats up and President Xi Jinping prepares to travel to the United States. Diplomatic niceties might be outwardly maintained, but some pointed conversations are likely to be held behind closed doors.
Investors are now concerned that China’s economy is even weaker than anyone could have guessed.
The table has been set with a bountiful serving of disputes: the alleged hacking of U.S government personnel records by Chinese operatives; maritime skirmishes between China and its neighbors in the South China Sea; and now renewed allegations that Beijing is manipulating its currency to gain an economic advantage on U.S. businesses. China’s GDP grew by 7% during the six months ending 30 June 2015, which is considerably higher than most other major economies.
“The central bank, if necessary, is fully capable of stabilizing the exchange rate through direct intervention in the foreign exchange market to avoid herd mentality resulting in irrational movements of the rate”, economist Massachusetts Jun with the People’s Bank of China told reporters.
‘If true it is an utterly baffling move, one that reflects a worryingly lack of clarity and/or sense in the decision making process’.
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China is just the latest headache facing Fed officials. What this adds up to, according to a wire from David Malpass, one of the fastest and shrewdest economists on the beat, is a de-linking of the yuan and the dollar.
