China devalued its currency on Tuesday amid a slowing economy and a stock market slump.
The People’s Bank of China set the official guidance rate for the renminbi down nearly 2 percent prior to market open to 6.2298 yuan per dollar — its lowest point in almost three years — from 6.1162 the previous day in what it said was a change in methodology to make it more responsive to market forces, Reuters reported.
The yuan dropped 1.8 percent to 6.32 per dollar as of 1:34 p.m. in Shanghai, Bloomberg News reported. It slid 2.3 percent in Hong Kong’s offshore trading.
“Since China’s trade in goods continues to post relatively large surpluses, the yuan’s real effective exchange rate is still relatively strong versus various global currencies, and is deviating from market expectations,” the central bank said.
“Therefore, it is necessary to further improve the yuan’s midpoint pricing to meet the needs of the market.”
The central bank called it a “one-off depreciation”, but economists were divided over the significance of a move that appears to reverse the recent policy of maintaining a strong yuan, which has buttressed policy goals of boosting domestic consumption and outward investment, Reuters said.
“For a long time I gave the PBOC credit for holding the line on the renminbi and recognizing that while it might be tempting to try to shore up the old growth model by devaluing the currency, that really was a dead end,” said economist Patrick Chovanec.
Chovanec allowed that a weaker yuan might better reflect current market demand, but he said the strong yuan served a more important goal of forcing “painful” economic transformation toward consumption and away from low-end manufacturing.
“What the world needs from China is not more supply; what it needs is demand,” he said.
Other economists said the move could, however, address a frustration among currency traders with the government’s heavy hand in the market, and pointed out that nearly all of China’s neighbors had debased their currencies while China held firm.
While cutting the exchange rate will not address all the ills of China’s export sector, which is hobbled by rising labor costs and quality problems, Guo Lei, economist at Founder Securities in Shanghai, said it would help relieve deflationary pressure, a far bigger economic concern.
Data released over the weekend showed China’s exports tumbled 8.3 percent in July, hit by weaker demand from Europe, the United States and Japan, while producer prices are well into their fourth year of deflation.
Collapsing prices for global commodities have been blamed for the producer price deflation, putting the country at risk of repeating the deflationary cycle that has blighted Japan for decades.
Growth in China, the world’s second-largest economy, has slowed markedly this year and is set to hit a 25-year low even if it meets its official 7 percent target.
Tuesday’s move sparked declines in the offshore yuan market and in currencies including the Australian dollar and the Korean won, and caused airline shares to fall, given the impact higher fuel prices will have on their bottom line.
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