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Chinese central bank warns of continuing changes

Worries about the situation in China also weighed on the markets following a sell-off by stocks even as the People’s Bank of China set the mid-point of the dollar-yuan exchange rate slightly higher. It is imperative to state that the yuan has devalued by close to 2.9 percent since Thursday’s surprise move to attain a more “flexible exchange rate”.

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“Historically whenever the Fed has started raising rates, emerging market currencies haven’t done well”, HSBC’s Pedley said.

“It’s not that China is trying to intentionally lower the yuan long-term”.

“The CSRC made it clear last week that the state will withdraw from regular market intervention to support share prices“, said a senior trader at a major Chinese brokerage in Shanghai. For them, a weaker yuan means less revenue when the currency is converted back into U.S. dollars.

Stock markets were calmer in recent days as investor attention shifted to the yuan, which declined sharply following Beijing’s decision to change the way its daily exchange rate limits are calculated. Japan’s Nikkei 225 dipped 0.3 percent.

The indexes had slumped more than 5 percent at one point in morning trade, after plunging 6 percent on Tuesday following comments by China’s securities regulator that the market has normalised and the government would allow market forces to play a bigger role in determining stock prices. People don’t want their money in yuan if its value is dropping. But because the yuan was tied to a rising U.S. dollar, it remained at high levels.

The central bank said it was going all out to defend the rupiah with a plan to tighten curbs on dollar purchases over the counter. Many economists also suspect a contributing factor: Beijing may be desperately trying to boost its economy. The stock is down 17 percent since China devalued the yuan last week. And they need help: Exports dropped a steep 8.3 percent in July year over year. Signs of trouble are accumulating.

The New York Fed’s Empire State general business conditions index tumbled from 3.86 in July to -14.92 in August, its lowest since April 2009, due to steep drops in new orders and shipments. However, if the renminbi continues to fall, this is similar to export deflation to the world, making it a move that would definitely be opposed by all other countries.

Avoiding depreciation expectations and capital outflows has become more important for the government in determining its next monetary step, Wang Tao, chief economist in China at Swiss firm UBS AG, told China Daily.

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“[The devaluation of the Chinese yuan] seems to have effects on [Korea’s] export competitiveness and the exodus of foreign investment”, Lee said at the press conference. The U.S. central bank, increasingly confident in the strength of the U.S. economy, is expected to raise the short-term rate it controls later this year. At a broader level, the devaluation trains attention on China’s growth model and the unsustainable practices it needs to unlearn, say experts.

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