August 11, 2015 4:36 am
China has sharply weakened the renminbi, moving the currency almost 2 per cent in its most significant devaluation since the mid-1990s, marking a major escalation in the so-called currency wars.
The central bank’s move pushed the renminbi’s “daily fix” to Rmb6.2298 against the dollar, compared with a Rmb6.1162 rate the day before. The 1.9 per cent move was its biggest one-day change in the decade since China abandoned its tight currency peg for a managed float.
Before Tuesday the biggest shift this year had been a 0.16 per cent adjustment.
The move comes as China battles a slowing economy and amid a push to have its currency accepted as a global reserve by the International Monetary Fund.
Last week a report from the IMF highlighted operational difficulties in including the renminbi such as the divergence between onshore and offshore rates, onshore illiquidity and the mainland market’s short trading hours.
On Tuesday the People’s Bank of China said the move was a one-time adjustment to reflect changes in the way it calculates the daily fix — the rate at which the central bank sets the currency every morning and from which the currency is allowed to move as much as 2 percentage points in either direction.
The PBoC said that in future the quotes reported to it by market makers should be “in conjunction with demand and supply condition in the foreign exchange market and exchange rate movement of the major currencies”.
Market observers said they expected that to leave the PBoC with a large degree of the control it had previously, while allowing it to respond to the IMF’s concerns.
Both the onshore and offshore rates moved sharply in response to the PBoC’s announcement, hitting their weakest points in almost three years. Onshore renminbi, the price that trades around the fix rate, traded at Rmb6.2986 against the dollar, while the offshore rate, which can diverge from onshore but usually tracks it, reached Rmb6.3035.
Why China’s devaluation might not trigger a currency war
Worries that China’s currency devaluation is a precursor of drastic weakening ahead, exporting deflation to the rest of the world, are probably going too far.
While currency markets were looking for the renminbi to weaken, Tuesday’s move caught traders off guard.
Economists had expected China to boost its economy through other measures, such as cutting the reserves banks must keep with the central bank to boost lending.
“The markets were looking for [reserve] cuts, not this revaluation/depreciation,” said Annette Beacher, chief Asia-Pacific macro strategist at TD Securities. “This was a shock to otherwise sleepy summer markets.”
The depreciation will help combat an unexpectedly large fall in China’s exports caused in part by the renminbi’s relative strength against the dollar, while rival exporters’ currencies have weakened, boosting their competitiveness.
Data this week showed exports dropped 8.3 per cent in July from the same period last year — far more than the 1.5 per cent that had been expected.