Yahoo Finance China Devalues Yuan For Third Straight Day
Having signalled on Tuesday that the country's currency intervention was a 'one-off depreciation', China has devalued its currency for a third consecutive day.
The move by the People's Bank of China (HKSE: 3988-OL.HK - news) serves to highlight the increasing level of concern awarded to the world's second-largest economy.
As previously reported, Chinese exports in July came in 8.3% lower than the prior year after fears that the strength of the yuan was rendering Chinese exports uncompetitive.
A strong currency makes a country's exports more expensive, which in turn reduces export volume therefore eroding any trade surplus.
China determines a midpoint level for the value of the yuan.
The currency is then allowed to move 2% above or below this midpoint in daily trading. This is known as the daily fixing.
However, Chinese officials sometimes disregard the daily moves and on occasions set the daily fixing such that the yuan is stronger against the dollar a day after the market has indicated it should be weaker.
On Wednesday, the dollar/yuan fixing was at 6.33 - 1.6% weaker than Tuesday's fix, which in turn was 1.9% weaker than Monday's.
Following yesterday's announcement, the yuan weakened by 1.4%, on the onshore markets, to 6.42.
On the offshore markets, where trading is not restricted by the daily 2% band, the Chinese currency weakened 1.8% to 6.5 - its weakest level in four-and-a-half years.
China, fearful of the rate of decline in the yuan's value was then rumoured to have intervened by selling US dollars and buying the yuan thereby supporting the currency and stemming any further losses, this behaviour is believed to have continued into Thursday's trading session.
However, the hastily called press conference earlier this morning suggests that Chinese officials remain concerned by the currency's collapse this week.
The strategy seemed to work as the yuan's daily decline of 1% was halved following the briefing.
The yuan has lost 3.3% of its value this week - which to put it into perspective is bigger than any full year move in seven of the last 10 years.
China's decision to move from a pegged exchange mechanism to a managed-float system has partly been driven by the strengthening US dollar, the currency to which it has historically been pegged.
The dollar's strength together with loss Japanese monetary policy has meant that since mid-2012 the yuan is 60% stronger than the Japanese yen, the currency of a country which which it competes fiercely for exports.
In addition, to its attempts to restore export volumes it is also rumoured that the Chinese are hoping to achieve reserve currency status.
For the yuan to be included in the International Monetary Fund's (IMF) basket of reserve currencies, known as the Special Drawing Rights or SDR, reforms which make the setting of the yuan's value more market-determined and transparent are widely believed to be needed.
The IMF welcomed the decision saying: "The new mechanism for determining the central parity of the Renminbi [yuan] announced by the PBC [People's Bank of China] appears a welcome step as it should allow market forces to have a greater role in determining the exchange rate."
The People's Bank of China insists there is no ground for sustained yuan depreciation, however a third consecutive daily devaluation would suggest otherwise.
