China devalues yuan nearly 2% to the dollar

Aug 11, 2015, 12:12 PM EDT
Chinese yuan
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In a surprise move, China devalued its currency, the yuan, nearly 2% to the dollar. China devalued its currency on Tuesday after a run of poor economic data, a move it billed as a free-market reform but which some suspect could be the beginning of a longer-term slide in the exchange rate, reports Reuters. The central bank set its official guidance rate down nearly 2 percent to 6.2298 yuan per dollar - its lowest point in almost three years - in what it said was a change in methodology to make it more responsive to market forces. It was the biggest one-day fall since a massive devaluation in 1994 when China aligned its official and market rates.

"Since China's trade in goods continues to post relatively large surpluses, the yuan's real effective exchange rate is still relatively strong versus various global currencies, and is deviating from market expectations," the central bank said. "Therefore, it is necessary to further improve the yuan's midpoint pricing to meet the needs of the market." The People's Bank of China (PBOC) called it a "one-off depreciation", but economists disagreed over the significance of a move that reversed a previous strong-yuan policy that aimed to boost domestic consumption and outward investment.

A steep drop in the Shanghai and Shenzhen stock markets in late June and early July, only halted by aggressive government actions, appears to have dented consumer demand within China, writes the New York Times. The China Association of Automobile Manufacturers announced on Tuesday that nationwide car sales fell 7 percent last month compared with a year ago. Excluding months distorted by the timing of Chinese New Year, it was the steepest drop in sales since December 2008, at the depths of the global financial crisis. China’s devaluation represents a difficult dilemma for the Obama administration. The United States Treasury has tried to use quiet diplomacy in recent years to encourage China to free up its currency policies, while blocking efforts in Congress to punish China for major intervention in currency markets over the past decade to slow the rise of the renminbi. Many in Congress have long accused China of unfairly building up its manufacturing sector at the expense of American jobs by undervaluing the renminbi, and the Chinese devaluation could fan those criticisms.

In a seeming nod to such concerns, the central bank said that it would begin to use the market closing, not the previous morning’s official setting, to calculate the renminbi’s official daily fixing against the dollar. But China’s economic weakness now means that further opening up of the currency to market forces could mean a weaker renminbi, not a stronger one. That, in turn, would make Chinese goods even more competitive in the United States and Europe.