China’s yuan hit a four-year low yesterday, slipping further a day after authorities devalued the yuan in a move that sparked fears of a global currency war and raised concerns that Beijing was looking to support its struggling exporters.
Spot yuan fell to 6.43 per dollar, its weakest point since August 2011, after the central bank set its daily midpoint reference even weaker than Tuesday’s devaluation. The currency fared worse in offshore trade, touching 6.57.
The central bank, which had described the devaluation as a one-off step to make the yuan more responsive to market forces, sought to reassure financial markets on Wednesday that it was not embarking on a steady depreciation.
“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 a statement.
Tuesday’s devaluation followed a run of poor economic data and raised market suspicions that China was embarking on a longer-term slide in the exchange rate. It was the biggest one-day fall in the yuan since a massive devaluation in 1994.
A cheaper yuan will help Chinese exports by making them less expensive on overseas markets. Last weekend, data showed an 8.3% drop in exports in July and that producer prices were well into their fourth year of deflation.
More indicators due later today for factory output, retail sales and fixed-asset investment are expected to underline sluggish growth in the world’s second-largest economy.
The International Monetary Fund said China’s move to make the yuan more responsive to market forces appeared to be a welcome step and that Beijing should aim to achieve an effectively floating exchange rate within two to three years.
Beijing has been lobbying the IMF to include the yuan in its basket of reserve currencies known as Special Drawing Rights, which it uses to lend to sovereign borrowers. This would mark a major step in terms of international use of the yuan.
“Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets,” an IMF spokesperson said in an emailed statement.
The rapid drop in the value of China’s currency - more than 4% in the last two days - dealt a body blow to appetite for risky assets globally, with equities, currencies and commodities coming under selling pressure as money managers weighed the implications of China’s latest policy move.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.5% to two-year lows. Stock markets from Australia to Singapore were a sea of red in early deals.
Jens Nordvig, managing director of Nomura Securities, said in a note the yuan’s weakness over the last two days has the “potential to turn into a trend very quickly” and can impact US growth and “meaningfully impact risk sentiment”.
The Dow fell 1.2% and the S&P 500 shed 1% as China’s currency move on Tuesday added to worries about the global economic outlook and hit companies with large exposure to China, such as Apple Inc and Caterpillar.
Many Western firms have already been reporting slowing sales in China as its economy cools. Emerging market currencies from Indonesia to Brazil reeled as investors feared central banks around the world could rush to weaken their own currencies in response.
That meant only the greenback was left standing tall with the US dollar holding near a two-month high of 125.15 yen, while the broad dollar index was stuck within recent trading ranges.
Currencies considered as China proxies were singled out for special punishment, with the Australian dollar nursing losses at 0.7255 per dollar after falling more than 1.5% overnight.
“The bottom line is that we believe investors will orientate portfolios towards more rate cuts rather than currency weakness. Real rates are way too high, in our view,” wrote Sean Darby, chief global equity strategist at Jeffries.
