The State Council mentioned last month creating a mechanism that will allow free cross-border flows of the renminbi and widening its daily trading band among measures for stabilizing exports.
The Chinese currency has to go through market reforms if it intends to become a global currency.
That means the renminbi should depreciate, along with other major currencies, against the US dollar.
That will also help boost China’s weak exports.
Will Tuesday’s devaluation of the renminbi affect its inclusion in the International Monetary Fund’s special drawing rights (SDR) basket of currencies?
An IMF report said early this month that it should put off any move to add the renminbi to its SDR basket until Sept. 30 next year.
It’s just a matter of time before its inclusion given the use of the renminbi in global trading.
Therefore, a modest devaluation won’t have a big impact.
The Chinese central bank weakened the renminbi’s daily fixing rate to 6.2298 against the US dollar on Tuesday from 6.1162 the day before.
The move was intended to bring the daily fixing more in line with the market.
From now on, the daily fixing will align more closely with the closing spot rate on the previous day, foreign exchange demand and supply, as well as changes in major currency rates, the central bank said in a statement.
Market expectations that the renminbi will depreciate started to emerge over last two years.
The Chinese currency has been fairly strong so far this year, while other major currencies have weakened against the US dollar.
The market is widely watching whether the move will lead to further devaluation after a one-off drop of nearly 2 percent.
The strength of the renminbi will have an impact on China’s exports and overall economy.
The equity market, a thermometer of economic growth, will also be affected by the redback.
But the market remains divided over the impact on stocks.
Optimistic investors believe the weaker renminbi will benefit China’s export and shipping sectors, help the economy to recover, and benefit the stock market.
However, pessimistic investors say the move will spark further expectations for devaluation and will lead to further capital outflows given the reduced appeal of the redback.
The stock market has reacted calmly in response to the uncertainty created by the devaluation.
The Shanghai Composite Index remained unchanged, and the export sector outperformed.
Reform-relevant and shipping stocks surged 6.5 percent.
A weaker renminbi will make outbound travel more expensive, which would benefit firms catering to domestic consumption.
Shopping malls and trading firms posted a rise of over 3 percent.
Market turnover in Shanghai and Shenzhen reached 1.34 trillion yuan, in a sign that capital is flowing back into the stock market.
Meanwhile, the State Council has issued a statement promoting tourism and consumption.
There are plans to build and renovate 57,000 toilets at tourist destinations across the country within three years.
The statement also encourages employers to let weekends begin at noon on Friday.
As a result, the tourism sector posted a sharp rally.
China CYTS Tours Holding (600138.CN) touched the daily up-limit, and Huangshan Tourism Development (600054.CN) soared more than 9 percent.
However, I still believe infrastructure investment is the only effective way to bolster economic growth in the second half.
The reforms will be limited to stock market speculation, and the real effect remains unclear.
And a weaker currency will provide a limited boost for exports given the changing structure of China’s foreign trade.
This article appeared in the Hong Kong Economic Journal on Aug 12.
Translation by Julie Zhu
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