China Devalues Yuan by 2% to Boost Flagging Economy

11/08/2015 10:14

China has devalued its currency to boost flagging exports in a move that risks deepening the global currency war. After recent data showing falling exports and a stalling manufacturing sector, the People’s Bank of China (PBOC) said that it was allowing the yuan to weaken by nearly 2% in the hope of making China’s exports cheaper and pushing down borrowing costs. In what it called a “one-off depreciation”, the PBOC said the centre of the yuan’s trading band was reset 1.9% lower at 6.2298 per US$, its weakest point against the US$ for almost three years. The midpoint will now be based on the previous day’s closing price rather than being controlled centrally.The impact of the decision was felt across regional markets as investors fretted about a prolonged fall in demand from the world’s second biggest economy. 

The move is a sign that the country’s leaders are increasingly concerned about the economy, which has lost competitiveness as the yuan has climbed in relation to other currencies such as the yen and the euro. “The yuan had become relatively expensive as other Asian currencies weakened against the dollar. With fears of an economic slowdown mounting, devaluing the yuan was the only thing China had not tried after implementing monetary, fiscal and equity-boosting policies,” said Masafumi Yamamoto, senior strategist at Monex in Tokyo. "Devaluation of the yuan likely won’t end here. Currencies like the Singapore dollar, South Korean won and Taiwan dollar, which stand to compete with China, are falling, and today’s move could generate headlines heralding the start of a devaluation war,” he said. It may also draw criticism from the US which has in the past accused China of “manipulating” its currency lower.