China’s yuan plunges nearly 2pc again, sparking fears of currency war in region

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China’s yuan weakened further at the open today, after the central bank startled markets on Tuesday by pushing the yuan down nearly 2 per cent through an aggressively weaker guidance rate.

The People’s Bank of China, the country's central bank, trimmed the reference rate – the daily fix that sets the value of the Chinese currency against the greenback – by 1.62 per cent. It set the midpoint rate at 6.3306 per US dollar prior to market open, sharply weaker than the previous fix of 6.2298, a day after the unit was devalued  by nearly 2 per cent.

Wednesday’s fix was even lower than Tuesday’s close of 6.3232 yuan to the  dollar.

Asian currencies tumbled for a second day amid concern the yuan’s weakening will reignite a currency war in the region. 

Tuesday’s devaluation, the biggest since 2005 when China unpegged the yuan, also known as the renminbi (RMB) from the dollar, raised worries over the health of the world’s second-largest economy.

The action was widely viewed as way to help boost exports by making them  more competitive as economic growth slows, although China’s central bank  described it as a one-off move to reform its exchange rate system.

Previously, Chinese authorities based the fixing on a poll of  market-makers, but the PBOC said on Tuesday that they would now also take into account the previous day’s close, foreign exchange supply and demand and the rates of major currencies.

The spot market opened at 6.4300 per dollar and was changing hands at 6.4162 in early trade, 931 pips away from the previous close and 1.35 per cent softer than the midpoint. That markets the currency’s weakest rate since August 2011.

The spot rate is currently allowed to trade with a range 2 per cent above or below the official fixing on any given day.

The offshore yuan was trading -1.44 per cent away from the onshore spot at 6.5101 per dollar.

"Today’s weak fixing indicates the PBOC wants to see further depreciation in the yuan, as yesterday’s drop won’t be enough to prop up China’s exports," said Kenix Lai, a foreign-exchange analyst at Bank of East Asia in Hong Kong told Bloomberg. "Capital will flee from China to the US due to the economic slowdown and the yuan devaluation."

The PBOC said today that there was no economic basis for the currency to keep devaluing, highlighting the nation’s current-account surplus and US$3.65 trillion of foreign-exchange reserves, Blooomberg reported.

This week’s unexpected devaluation shows policymakers are now placing a greater emphasis on supporting exports, having previously been propping up the yuan to deter capital outflows, protect foreign-currency borrowers and encourage greater global usage, the report said.

South Korea’s won, Malaysia’s ringgit and Indonesia’s rupiah all fell at least 0.9 per cent against the dollar.

The PBOC said on Tuesday that market-makers who submit prices for the reference rate will have to consider the previous day’s closing spot rate, foreign-exchange demand and supply, as well as changes in major currency rates. Previous guidelines made no mention of those criteria.

Chinese authorities maintain strict controls on the currency, allowing it to trade only within a 2 per cent range of the daily reference rate. 

SG Global Economics said in a research report that depreciation “should  help the struggling Chinese economy”.

“Although the PBOC referred to the move as a one-off, [we] now see the bias  for further depreciation,” it said.

China is also seeking to reform its yuan policy in an effort to have it included in the International Monetary Fund’s basket of “special drawing  rights” (SDR) reserve currencies.

Source: SCMP

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