The yuan had strengthened along with the dollar, hurting exporters and raising the risk of politically risky job losses in manufacturing industries that employ tens of millions of workers.
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The yuan’s fixing against the U.S. dollar was lowered 1.9% Tuesday from the previous day, its biggest-ever move in a single day.
Beijing is likely to move cautiously but market expectations of more depreciation “could quickly become entrenched” and cause the yuan to “depreciate quite quickly and significantly”, said Wang. The unit is allowed to fluctuate two percent on either side of the daily rate on the domestic foreign exchange market. Spot yuan plunged roughly 2 percent to as low as 6.3360, weakest since September 2012.
“This looks like a move to a more open market policy”, said Stephen Innes, senior dealer at OANDA Australia and Asia Pacific.
However, Beijing would still have a large say in setting the new midpoints, given the heavy influence of state banks in daily trade of the yuan.
Sentiment had got a lift from Wall Street, where the Dow had ended Monday with gains of 1.39 per cent, while the S&P 500 climbed 1.28 per cent and the Nasdaq 1.16 per cent.
“The value drop of yuan against the US dollar will put pressure on the US because it wants the yuan to appreciate, which would help with its trade”, she said.
Other currencies in the region also lost ground to the U.S. dollar as investors reasoned they would have to ease to stay competitive with China. The composition of that basket is secret but the dollar appears to dominate it, which means the yuan has been rising even as the currencies of other developing countries fell.
Analysts said data showing a slump in exports over the weekend could also have prompted the move, which should make Chinese goods cheaper overseas.
The Aussie and the kiwi are each down more than 10 per cent this year against the greenback as weakening Chinese demand drives down prices for the commodity exports on which the Antipodean nations’ economies depend.
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“What is really important is for markets to observe where the renminbi really goes over the next few days to see whether this is indeed a one-off adjustment or a sustained trend”, said Vishnu Varathan, economist with Mizuho Bank in Singapore. But he said a weaker yuan “could be ultimately positive for Asia” if it helps to revive Chinese demand for imports.
