PBOC’s announcement had caught investors by surprise, as the currency of the world’s second largest economy had been deemed stable. But a cheaper yuan poses a threat to U.S. exports and economic growth. “Concerns that the slowdown in China will hurt other Asian countries with close link to China are weighing as well”, Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.
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In Zambia, copper mines are laying off workers or closing because local power shortages have made it too costly to keep production up as long as China’s waning demand holds global prices near six-year lows. Some members of Congress have backed legislation to impose retaliatory tariffs.
The PBOC took the initiative and weakened the yuan in a bid to get ahead of speculators seeking to bank on the market expectations of the currency’s depreciation. This might lower the future path of U.S. rates and restrain the rise of the U.S. dollar against emerging market currencies. Many believe that the steps to devalue the currency could ignite a possible currency war between China and the United States. Because of the rising value of the dollar, American industrial companies have lost a huge percentage of the export pie. The local currency and stock markets are still reeling from Beijing’s aggressive devaluation of the yuan. Traders see a 46 percent chance of a September rate increase, according to futures trading data compiled by Bloomberg.
A weaker yuan might prompt complaints by foreign manufacturers.
China’s securities regulator said last Friday that the government will allow market forces to play a bigger role in determining stock prices, the first official signal from Beijing that it could be moderating its efforts to prop up its equity markets via state-backed financial institutions.
The monetary authority bought yuan via agent banks last week to stabilize the exchange rate after an August. 11 devaluation triggered the steepest slide in two decades.
“This complex situation is posing new challenges”, said a central bank statement.
“The impact of the yuan move on global markets isn’t large”, he said. Until recently, the Bank would ignore the previous day’s trading when setting the new day’s price fix.
The weighted average of the overnight repurchase agreement rate, a benchmark measure of short-term borrowing costs among commercial banks, is now at 1.72%, up from 1.57% on the eve of the yuan’s devaluation. The composition of that basket is secret but the dollar appears to dominate it, which means the yuan rose even as currencies of other developing countries fell.
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ANALYST VIEW: The Chinese central bank’s “opaque communications policy may well have led to panic over-selling earlier in the week”, Angus Nicholson of IG markets said in a commentary.
