PBoC’s Deputy Governor Yi also said there was “no basis for a persistent weakening in the yuan, that it was a strong currency in the longer term, and that the aim of the PBoC is to have the market determine the exchange rate“, according to Barclays. The central bank then lowered the exchange rate, again, but based on market movements Tuesday.
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“This move may also trigger a new currency war” if central banks respond by trying to depress their country’s own exchange rates, said Nicholas Teo of CMC Markets in a report.
Meanwhile, China will extend the trading hours for the onshore yuan in a move to prompt the convergence of the onshore and offshore yuan market, said Zhang.
“They’ll get some relief on costs, and these companies will likely welcome the drop in China’s currency”, he said. “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. This comes after declines of at least 1.6% the previous two days roiled global markets and leave many economists and strategists wondering how high the dollar/yuan rate can rise (yuan fall).
And the prospect that it will force the Federal Reserve to rethink a widely expected U.S. interest rate hike this year – a possibility that creates uncertainties for financial markets. The previous rules allowed trading within 1 percent. The yuan has traded at a big discount in Hong Kong as opposed to the mainland, reflecting foreign investors’ increasingly pessimistic view of China’s economy.
Tim Harcourt, the JW Nevile Fellow in Economics at the UNSW Business School, says the action is an attempt to boost the country’s struggling export sector by making prices more competitive, and it will have ramifications at home. “It will dampen the confidence of investors in holding yuan, and affect the process of the internationalisation of the renminbi”.
The volatility in the normally stable unit has raised concerns, and many analysts predict the yuan will continue to depreciate in the coming months, impacting global trade flows.
As of now, every U.S. dollar is worth 6.31247 yuan.
The PBOC yesterday moved the yuan further against the dollar by setting its midpoint range lower than Tuesday’s closing price – a 1.6 per cent reduction – sending the currency to a four-year low against the dollar. Already, the International Monetary Fund is forecasting 6.8 percent economic growth in China this year, the slowest rate since 1990. The Fed wants to be “reasonably confident” inflation is returning to its 2% target before raising rates.
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Some experts said the devaluation would do more good than harm to the Korean economy.
