That era appears to be over.
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The devaluation of the yuan could help stimulate China’s declining export industry and boost the country’s economic growth slump.
The global financial institution also asserted that China should aim to achieve an effectively floating exchange rate system within two to three years.
If China’s economy has proved weaker than its authorities anticipated, “it’s probably not inappropriate for the currency to adjust in outcome to that weakness”, he said.
However, such a strategy goes against market rules but is necessary to prevent risks from spreading further into other areas, said Tao Dong, managing director and chief economist for non-Japan Asia at Credit Suisse. China is by far the world’s largest steel consumer and producer, accounting for about half of the world’s output. And though the central bank pledged to keep the yuan at a “stable” and “reasonable” level, it warned of temporary volatility ahead.
Economists pointed out that until Tuesday, China had held the yuan firm while its neighbours had debased their currencies.
Talking about credit growth in the economy, Subramanian said when the wholesale price index is in negative for eight months, one should not look at nominal credit growth. “China is the second largest economy, the biggest buyer of commodities and machineries, the anchor for Asian economies”.
“Increased uncertainties over Chinese yuan after today’s news from China prompted investors to avoid betting on riskier assets”, said Mr Park Seok-hyun, an analyst at Eugene Investment & Securities.
The U.S. has long accused China of keeping its currency artificially low, instead of allowing it to move freely in foreign exchange markets.
The Chinese central bank intervened Wednesday to prop up the yuan in the last minutes of trading, according to people familiar with the matter, in an apparent effort to prevent an excessive fall in the currency. “It may also impact foreign direct investment if China becomes a more attractive destination vis-a-vis India”, he said.
Beijing justified the currency shift by saying that it wants the free market to have greater influence in setting the price of the renminbi. The Nasdaq composite index fell 82 points, or 1.6 percent, to 5,018.
A strong currency makes a country’s exports more expensive, which in turn reduces export volume therefore eroding any trade surplus.
The yuan devaluation also may be designed to bolster China’s case for gaining admission to the worldwide Monetary Fund’s so-called Special Drawing Rights basket of currencies, which would bestow reserve currency status.
“This action is both an endeavour to make their yuan a more plausible credible candidate for inclusion in the SDR basket”, he said.
The yuan’s anchor role also may return given Chinese policy makers inclination toward stability, said Andrew Polk, Beijing based economist for the Conference Board. Copper dropped 6.9 cents to $2.33 per pound. The central bank didn’t reply to a fax seeking comment. Since the NDF contracts are settled in dollars, it allows investors to bet on the yuan without actually exchanging the currency.
“However, suggestions that China is engaging in a currency war could undermine the political goodwill towards it that will ultimately decide whether or not it is permitted to join”.
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What’s the impact in China?
