Emerging market currencies slid to historic lows, with the Turkish lira and South African rand in the spotlight, as investors headed for the safety of developed world economies.
Though the yuan opened slightly weaker on Thursday, the gap between the guidance rate and the traded spot market rate closed sharply as the central bank tried to slow a sharp sell-off that has knocked around 3.2pc off the currency since Monday’s close.
For years, the Communist Party basked in the sense that it was an almost infallible steward of the nation’s economy, which was growing by double digits around a decade ago as the country exported trillions of dollars of gadgets and other goods. And it should always be kept in mind that given the size of China’s economy, and the large size of its foreign exchange reserves, China can control its exchange rate more effectively than most countries can.
Many in the global banking community, such as the worldwide Monetary Fund, actually praised China for letting market forces have more of an influence on its currency.
China allowed the currency to strengthen mildly on Friday after three days of devaluing it against the dollar.
On Thursday, traders pushed the yuan down as much as 0.9% from its previous close to 6.4470 against the U.S. dollar.
Ding called the reform “a one-off move” to eliminate price distortions following the central bank’s intervention, and said it was unlikely policymakers would return to the former management system in future. Today the yuan was given a small boost against the US dollar by the PBoC’s fixing. Not so. As a number of shrewd analysts have noted, Apple’s supplier contracts with its Chinese parts and fabrication partners are denominated in U.S. dollars, so it will not realize any cost savings here.
The drastic nature of Tuesday’s adjustment, which came without clear warning, is still reverberating in global markets, as investors try to assess the weaker yuan’s implications for Chinese consumption.
Or so Beijing says.
A lower currency makes its exports cheaper and its locally made goods more competitive with imports. There are signs of trouble brewing in Germany over the bailout.
Already, China’s exports of diesel have reached an all-time high of 166,000 barrels per day (bpd) in July, according to a briefing note from consultants FGE, who also flagged the possibility of higher shipments as export restrictions may be further eased.
“I continue to believe that the actions and words of the PBOC signal that they have taken the currency to a new starting point, and this is likely to revolve around a trade-weighted regime”, said Andy Rothman, investment strategist at Matthews Asia.
[China’s devaluation of yuan prompts outcry from U.S.]. As it stands, inflation is running below the Fed’s 2% target although the Fed is confident it will catch up. This solid data point for the US economy bolsters the case for a data-dependent FOMC to keep their minds on a September liftoff for interest rate normalization.
Many economists saw Beijing’s policy change an effort to unload a glut of excess supplies in Chinese industries from steel to solar panel manufacturing that have led to price-cutting wars and threatened the financial health of manufacturers.