China skittled markets for a second day running yesterday after engineering a second sharp fall in the value of the yuan. But we had better get used to it because it is here to stay.
The country’s central bank dropped the official value 1.5%, which after Monday’s 1.9% fall, means the yuan is now 3.5% lower than it was on Monday night. But China intervened in the last minutes of trading yesterday to stop the yuan from falling too far, according to media reports overnight.
The yuan had dropped nearly 2% to its lowest level against the dollar during mainland trading, with one dollar buying about 6.45 yuan, as the People’s Bank of China followed through on its pledge to let market forces play a bigger role in determining the yuan’s value. But the currency kept on falling.
So the People’s Bank of China reportedly instructed state-owned Chinese banks to sell dollars on its behalf in the last 15 minutes of Wednesday’s trading, That saw the yuan jump about 1% in value against the dollar, bringing it to where one dollar would buy 6.3870 yuan.
The Chinese currency is now down 2.8% since Monday’s closing.
The move saw markets across Asia and Europe fall sharply, although the latter was pushed lower by German criticism of the 86 billion euro Greek bailout.
But by the time US markets traded, the selling rush had slowed – oil bounced back again from new six year lows, gold ended higher in one of its better days, and the Dow, S&P 500 and Nasdaq ended with flat instead of big falls.
Our market will start trading this morning with a small gain and the Aussie dollar jumped more than one and a half cents to be trading just under 74 US cents before 6 am. Earlier it had fallen to a low of 72.16.
The weaker yuan will pressure central banks in the region to allow their currencies to devalue their currencies to keep their economies competitive against China’s.
Southeast Asian currencies have been among the worst hit this year as emerging economies in the region sputter and the greenback rises ahead of an expected increase in American interest rates by the Fed next month.
The Malaysian ringgit fell 0.7% to 4 per US dollar, the weakest since 1998; the Korean won fell 1% to 1,191 per dollar, its lowest since October 2011; and the Japanese yen, eased a touch to to 125.2 per dollar, nearing a 13-year low against the greenback.
The Aussie market plunged after the news at 11.15 am Sydney time, ending down 91 points or 1.7%, and at a seven month low of 5382.1.
That was more than 10% down from its April peak, pushing it into a correction (a fall of 10% or more from its most recent peak). The All Ordinaries finished 1.6% down to 5383.5. The overnight futures trading has that fall being partially reversed.
China facing stocks were also whacked, led by Rio Tinto down 5.4% to $51.65, BHP Billiton 4.3% to $25.2 and Fortescue Metals Group 8% to $1.79.
The fall took the value of the yuan to a four-year low, renewing fears of a global currency war and adding to the belief that China is looking to support its struggling exporters.
The two days of cuts are effectively an interest reduction from the central bank.
The second cut was defended by the People’s Bank of China in a statement on its website said it was a cut in reaction to the fall in offshore markets overnight.
Tuesday’s first cut was accompanied by changes to the rate setting mechanism to try and make them more responsive to what happened to the value of the yuan in offshore markets (and whether it finished at the bottom or near the top of its 2% (either way of a midpoint) trading bands in the official market.
So no sustained devaluation, but perhaps a small, sporadic one? In fact more frequent moves in the value of the yuan will become the norm as the central bank seeks to adjust the currency’s value to market moves earlier in the session and overnight.
And the statement made it clear yesterday’s move wasn’t a devaluation – “Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan,” the People’s Bank of China said in the statement.
Value-added industrial output in China rose 6.0% in July from a year earlier, slowing from a 6.8% year-on-year increase in June, according to China’s National Bureau of Statistics.
July’s increase undershot the expected median gain of 6.6% by 13 economists polled in a Wall Street Journal survey.
Industrial production increased 0.32% in July from June. In June, it rose 0.64% from the month before.
Fixed-asset investment in nonrural areas of China rose 11.2% in the January-to-July period from a year earlier.
The rise was slower than the 11.4% increase recorded in the January-to-June period. It undershot the economists’ median forecasts for an 11.5% gain.
Retail sales in China increased 10.5% in July from a year earlier, slowing from a 10.6% year-over-year increase in June in line with a 10.5% forecast by economists.
