The combined drop is the biggest since China set up its modern foreign exchange system in 1994, when it devalued the yuan by 33 percent at a stroke.
The bank has since tried to calm fears that this is the beginning of a long-running depreciation.
“The argument that China is trying to spur growth by weakening its currency to spur exports does not strike us as very convincing”, said Standard & Poor’s chief economist for Asia-Pacific Paul Gruenwald.
According to Knightsbridge FX currency trader Rahim Madhavji, China’s move signals a downturn in overall global growth and casts doubt on whether the U.S. Federal Reserve will lift interest rates in September. Chances are that the US may react in a manner which may further queer the pitch, ” ASSOCHAM Secretary General, D S Rawat said.
When the PBOC first allowed the yuan to depreciate on Tuesday, it looked nearly promising-a decision that could both boost China’s exports and signal the country’s intent to let its exchange rate be influenced more by the free market.
One analyst said China’s currency moves would hurt appetite for risky assets such as equities and commodities.
The Chinese yuan is expected to weaken by about one percent in the coming year after the central bank stunned global markets this week by devaluing the currency by the most in 21 years, a Reuters poll showed on Wednesday.
Yields on 2-year German debt went to a new low of minus 0.29 percent, while Wall Street was off more than 1 percent in early trading.
In a sign that China is following through on its plan, the central bank set the yuan’s midpoint at 6.3306 on Wednesday – 1.6% weaker than the previous day’s midpoint, but near where the currency last traded.
And so as trading began on Wednesday, the bank attempted to keep up its free-marketish signaling even as the yuan declined further, calling the volatility a “normal phenomenon” in a statement. On Friday, China reported that its exports had plunged by 8.3 percent overall in July with dramatic declines of 12.3 percent to the European Union and 13 percent to Japan.
“China has caused uncertainty concerning the global economic growth and inflation, which has pressured the timeline for a U.S. rate hike”, he said. A central parity rate closer to the market rate will provide a more stable environment for macro-economic development.
The move followed a 1.9 percent devaluation of the renminbi on Tuesday.
The worldwide Monetary Fund said the change “appears a welcome step” to give market forces a bigger role.
It said in a statement: “The exact impact will depend on how the new mechanism is implemented in practice”. Investors around the world began to turn to the precious metal as a safe haven as markets went haywire and Chinese investors likely began buying gold incase its price in yuan continues to rise.