China tries to quell fears of more big devaluations

/ 01:49 PM August 13, 2015
China Currency

In this Tuesday, Aug. 11, 2015 photo, a bank clerk counts Chinese currency notes as her colleague attends a customer at a bank outlet in Huaibei in central China’s Anhui province. China’s surprise move on Tuesday to devalue its currency has intensified concerns about a slowdown in the world’s second-largest economy, whose growth rate has reached a six-year low. It is also fanning tensions with the United States and Europe, whose exports could become comparatively costlier. (Photo by Chinatopix via AP)

BEIJING — China tried Thursday to quell fears its yuan would fall further, saying it is close to market levels following declines that sparked fears of a “currency war” if other governments respond by pushing down their own exchange rates.

There is “no basis for persistent and substantial devaluation,” said a deputy central bank governor, Zhang Xiaohui, at a news conference. Zhang said the yuan is close to “market levels” after two days of declines.


The yuan fell 1.9 percent on Tuesday after a surprise change in exchange rate policy that Beijing said was aimed at making the tightly controlled currency more market-oriented. It fell again Wednesday and by midday on Thursday was down 0.3 percent. Those falls amount to a 3.1 percent drop for the week.

Shock waves from the devaluation had spread through financial markets, causing stocks and Asian currencies to tumble.


Thursday’s central bank comments came after analysts said allowing market forces free rein could drive the yuan sharply lower.

“It is very possible that we could see a 10 to 15 percent drop in the exchange rate against the US dollar in the next week or two,” said Duncan Innes-Ker of The Economist Intelligence Unit in a research note.

Investors saw Beijing’s move as an effort to benefit its exporters but many economists rejected that view because global demand is weak.

The yuan’s decline was small compared with fluctuations of freely traded currencies. But after a decade of little or no movement, the change rattled financial markets and threatened to fan political tensions with Europe and the United States.

While the International Monetary Fund welcomed Beijing’s support for market forces, the change sparked complaints in Washington by lawmakers who accuse Beijing of manipulating its currency to gain a trade advantage.

“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.

Asian currencies declined Wednesday as the lower yuan weighed on prices in markets where China is a major trader. Malaysia’s ringgit and the Indonesia rupiah plunged to their lowest levels in 17 years. The Singapore dollar, Taiwan dollar and Philippine peso fell to five-year lows.


China is exporting “deflationary pressure,” said Morgan Stanley analysts Hans Redeker, Ian Stannard and Sheena Shah in a report.

“This is not a marginal event, given China’s economic weight,” they said.

Neighboring Vietnam widened the band in which its currency, the dong, is allowed to fluctuate each day from 1 percent to 2 percent. That prompted suggestions Vietnam might be trying to help its exporters compete with Chinese goods.

On Wednesday, the Chinese central bank indicated it had no immediate plans to stop the yuan’s decline. It said the fluctuations would “converge to a reasonably stable zone” following a “short period of adaptation.”

Until now, Beijing set the yuan’s value each day based on a basket of currencies that is believed to be dominated by the U.S. dollar. That meant the yuan rose with the dollar over the past year, hurting Chinese exporters and raising the threat of politically dangerous job losses. Exports in July fell by an unexpectedly steep 8.3 percent from a year earlier.

The yuan, also known as the renminbi, is allowed to fluctuate in a band 2 percent above or below a rate set by the People’s Bank of China based on its currency basket.

The central bank said that starting Tuesday, the daily target will be based on the yuan’s closing the previous day and information from traders about currency supply and demand.

Tuesday’s change probably was the “start of an engineered depreciation,” said Mizuho Bank in a report.

China’s economic growth has slowed to an annual rate of just 7 percent, which is healthy for most countries but far below the previous decade’s double-digit pace.

China becomes the third major trader to take actions that lower the value of its currency. Initiatives by Japan and the European Union over the past two years depressed the yen and euro by wider margins than this week’s decline in the yuan.

DBS called the devaluation a “small and long-overdue adjustment that barely begins to make up for the really big moves in the dollar, euro and yen.”

Beijing’s move could complicate the U.S. Federal Reserve’s decision about when to raise interest rates that have been near zero since the 2008 global financial crisis. The Fed was expected to act later this year.

A weaker yuan would reduce the price of Chinese goods, pushing down already-low U.S. inflation of 1.3 percent. The Fed wants to be “reasonably confident” inflation is returning to its 2 percent target before raising rates.

The IMF said the latest change would have no effect on the decision about whether to add the yuan to the dollar, the euro, the yen and the British pound in the basket of currencies used to set the value of the Fund’s in-house currency, called Special Drawing Rights.

The IMF staff recommended last week that China wait until at least October 2016 to join. The Fund’s board is due to consider that recommendation in October.

“The more liberal approach to managing the exchange rate could bolster China’s claims that the renminbi is ‘freely usable,’ strengthening its case for inclusion in the IMF’s SDR currency basket,” said Innes-Kerr of the Economist Intelligence Unit.

“However, suggestions that China is engaging in a currency war could undermine the political goodwill towards it that will ultimately decide whether or not it is permitted to join.”

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TAGS: China, currency, exchange rate, Yuan
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