China has triggered fears of a currency war by devaluing the Yuan by 1.9% against the US dollar yesterday, the largest since 1993. The move was done to make the Yuan more market orientated.
Yesterday’s cut took the currency’s level against the greenback to a three year low so large was the move.
The news sent tremors through global markets. Sharemarkets through Asia were knocked into the red, Monday’s rebound in commodities ended, European markets weakened sharply and US markets lost ground.
Oil fell by more than 3% to new 2015 lows, copper fell, shares of companies with exposure to China tumbled. Only gold rose – but the $US4 rise was derisory given the shockwaves from the Chinese move.
Apple shares fell 5% in the US, helping drag Wall Street lower. the Dow lost 1.2%, S7P fell nearly 1% and Nasdaq lost nearly 1.3%.
The Aussie dollar dipped under 73 US cents briefly, down more than a cent in a day and was trading at that level in early Asian trading. The local market will start with a fall of more than 30 points.
All eyes will be on the 11.15 am (Sydney time) announcement of the trading band for the yuan this morning.
The cut yesterday came after China’s July trade figures on Saturday revealed a worrying slide in exports in July and the first six months of 2015.
While it wasn’t the first month this year exports have fallen, it was obviously one too many for the government and the currency devaluation followed.
More data out today in China will conform that production, investment and retail sales remain weak. The devaluation will make imports a bit more expensive, but won’t offset the slide in commodity prices that have seen China’s imports fall (even though volumes of imports rose sharply in July).
The move won’t be welcome by rival exporters in Japan, Taiwan and South Korea. Nor will the US be a big fan, as some of its manufacturers battle cheap imports from China. Several senior politicians criticised the move overnight in Washington.
China is already raising hackles with unchecked exports of aluminium, steel and a range of semi finished metal products, triggering concern in Australia, the US and Europe, with anti-dumping and other trade complaints growing by the week.
Up till now China had been keeping the Yuan at a high level, allowing more than $US340 billion in capital to move out of the financial system since June last year. Chinese exports have lost ground in some markets as a result.
Some of that was nervous capital, but much of it was Chinese companies pushing money offshore to speculate against the Yuan, which ha]s now paid off.
In a statement, the Chinese central bank said that it had changed the way it calculated the currency’s daily midpoint against the greenback. It now taking the midpoint from market-makers quotes and the previous day’s closing price Up till today, the People’s Bank of China fixed the currency at a certain point, allowing investors to trade the currency within a 2% band of the mid-point each day.
Usually the moves are tiny. But yesterday came the 1.9% slice – the Financial Times says that before the big cut, the largest this year was 0.16%.
The huge move suggests the PBoC wants to support exports, a key driver for the economy, after the latest trade data for showed they tumbled 8.3% year-on-year in July, and are lower for the first seven months of the year than a year ago.
The PBoC had kept the yuan broadly stable against the US dollar since March and had been tightening its grip on the exchange rate as it tries to encourages greater global use as part of the push for official reserve status at the International Monetary Fund.
That is due to be decided at the Fund’s autumn meeting in September.
