China’s currency extended its loss in value on Wednesday, a day after the central bank’s decision to improve the yuan’s central parity system that aims to better reflect its market exchange rate against the US dollar.
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For the second day in a row, China has cut its yuan rate, and global markets were quick to react negatively.
YUAN SLIDE: The Chinese currency fell for a third day on Thursday but by midday its decline was subdued compared with drops of up to 2 percent on the previous days.
“We think this is part and parcel of a range of reforms China has been going through over the past several years to prepare for opening up their capital accounts”, said David Watt, chief economist at HSBC Canada. “You don’t want to see a 10 or 20 per cent move in the Chinese currency”.
“China is still a big unknown, and the market is pricing in the worst”, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York. Following the press conference, the Shanghai Composite Index was trading up 1.3 percent, while the smaller Shenzhen Component index was up 1.9 percent.
The US dollar weakened against most major currencies, with US debt yields lower also, as investors questioned whether China’s devaluation would affect the Federal Reserve’s plans to raise interest rates later this year.
China’s economic growth has slowed to an annual rate of just 7%, which is healthy for most countries but far below the previous decade’s double-digit pace. Markets have been rife with rumours about China wanting to exacerbate a currency war.
Lawmakers have expressed alarm at a series of provocations, including the alleged hacking by the Chinese of U.S. government workers’ personnel records and maritime skirmishes between China and its neighbors in the South China Sea. “But ultimately if we get a very strong release today, market expectations for a September interest rate hike will probably bounce right back”.
Beijing’s change in currency exchange policy brought criticism from several members of the U.S. Congress who say it continues a practice that gives Chinese exporters an unfair advantage, and hurts American jobs.
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The central bank, which had described the devaluation as a one-off step to make the yuan more responsive to market forces, yesterday sought to reassure financial markets that it was not embarking on a steady depreciation.
