4% Yuan Devaluation in 2 days - Impact on India
China stuns financial markets by devaluing yuan for second day running
China stunned the world’s financial markets on Wednesday by devaluing the yuan for the second day running, sparking fears that the world’s second largest economy is in worse shape than investors believed.
The currency hit a four-year low on Wednesday after the People’s Bank of China set the yuan’s daily midpoint even weaker than in Tuesday’s devaluation.
With the bank having said that Tuesday’s move was a “one-off depreciation”, the rapid drop in the value of China’s currency – around 4% in the last two days – dealt a blow to appetite for risky assets, and markets across the region plunged amid concerns that Beijing has embarked on a damaging currency war.
Stocks, currencies and commodities came under heavy pressure as money managers feared it could ignite a currency war that would destabilise the global economy.
The Nikkei stock market index in Japan was down more than 1% while the Hang Seng in Hong Kong was down 1.64%.
The Australian dollar, often seen as a proxy for the Chinese economy, fell again to a fresh six-year low of US$72.25c, having been sold off heavily on Tuesday. The US dollar, on the other hand, rose strongly again against all Asian currencies.
Oil was hit, too, with Brent futures were down 31c at $48.87 per barrel at 0251 GMT. US crude was trading at $43.02 per barrel, down 6 cents from Tuesday when it marked its lowest settlement since March 2009. Key industrial and construction materials nickel, copper and aluminium also hit six-year lows.
“China’s currency moves will hurt appetite for risky assets such as equities and commodities,” said Rajeev De Mello, head of Asian fixed income at Schroders in Singapore.
“While it is too early to say whether this is the beginning of a sustained devaluation of the yuan, other central banks may be forced to follow suit and that may trigger a fresh round of currency weakening around the emerging world.”
Wall Street was already reeling from Tuesday’s devaluation, with the Dow falling 1.2% and the S&P 500 a similar amount. More selling is expected when European and US markets open later on Wednesday.
Spot yuan fell to 6.43 per dollar, its weakest point since August 2011, after the central bank set its daily midpoint reference even weaker than Tuesday’s devaluation. The currency fared worse in offshore trade, touching 6.57.
The central bank, which had described the devaluation as a one-off step to make the yuan more responsive to market forces, sought to reassure financial markets on Wednesday that it was not embarking on a steady depreciation.
“Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan,” the PBoC said on Wednesday.
Tuesday’s devaluation followed a run of poor economic data and raised market suspicions that China was embarking on a longer-term slide in the exchange rate. It was the biggest one-day fall in the yuan since a massive devaluation in 1994.
Analysis Why has China devalued its currency now and what impact will it have?
Beijing devalues yuan by nearly 2% against dollar, which will make Chinese goods cheaper after figures showed 8.3% fall in exports in July
A cheaper yuan will help Chinese exports by making them less expensive on overseas markets. Last weekend, data showed an 8.3% drop in exports in July and that producer prices were well into their fourth year of deflation.
More indicators due on Wednesday for factory output, retail sales and fixed-asset investment are expected to underline sluggish growth in the world’s second-largest economy.
The International Monetary Fund said China’s move to make the yuan more responsive to market forces appeared to be a welcome step and that Beijing should aim to achieve an effectively floating exchange rate within two to three years.
Beijing has been lobbying the IMF to include the yuan in its basket of reserve currencies known as Special Drawing Rights, which it uses to lend to sovereign borrowers. This would mark a major step in terms of international use of the yuan.
“Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets,” an IMF spokesperson said in an emailed statemeny more
Perseverance is the remedy. we can reduce rate of bank interest to industries, so that we can make in India competitively. Our people will walk with the Govt if Food items , edible oils, vegetables are made available at low prices . Spanish Armada was destroyed B caus "God sent the Winds". We can pray God 2 send good monsoons. more