China Devalues Its Currency

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China Devalues Its Currency

China Devalues Its Currency

Aug 12 2015, 08.28am GMT


With the Chinese economy very much in the doldrums, the country’s central bank devalued the tightly controlled currency on Tuesday, followed by a further devaluation on Wednesday (Beijing time) to put the cat amongst the pigeons on global currency markets.

The devaluation, which was met with disapproval from United States lawmakers, will be further aggravated by the additional devaluation on Wednesday.

The fixing for the yuan was lowered by 1.9% on Tuesday, causing its biggest one day loss in 20 years, as the world's second biggest economy struggles to reignite industrial growth.

The Chinese Central Bank announced a change of policy on its website saying that the yuan’s midpoint has moved away quite a bit from its actual market rate for a relatively long time and that the time had come to establish the midpoint at a more market related number.

The move in value of the yuan on Tuesday means that the fixing will now be based on how it closed in the previous trading session. This meant the fixing was weakened by 1.9% on Tuesday and by a further 1.6% on Wednesday which sets the rate for trading in the currency for the day.

Despite the sentiments of U.S. lawmakers regarding the currency move, the International Monetary Fund (IMF) called the new way of valuing the yuan announced by China as a “welcome step” toward making the currency more sensitive to market forces, according to the Wall Street Journal.

In an effort to reduce concerns about a further slide in the yuan value, the People's Bank of China issued a further statement on its website saying, “From the perspective of economic and financial conditions both at home and abroad, there is no basis for a continued depreciation of the yuan at this point.”  

The implications for the global economy of this move by China will be to make Chinese goods cheaper on world markets and from a U.S. perspective, more competitive with American products.

The move in the currency shortly before next month’s scheduled visit by Chinese President Xi Jinping to Washington, adds a new element to relations between Washington and Beijing.

U.S. legislators have accused Beijing of manipulating its currency to the advantage of its exporters for many years while the Obama administration has regularly referred to the Chinese currency as “significantly undervalued.”

The Wall Street Journal reports that Michael Wessel, a member of the U.S.-China Economic and Security Review Commission, a congressionally mandated body that monitors the economic and security relationship between the two countries, said, “China is electrifying the currency manipulation issue at the worst possible time for Obama as he seeks to limit controversy before President Xi’s visit to Washington and to sweep the TPP currency issue under the rug.”

President Obama has been quoting China’s questionable reputation in Washington in order to garner support for his signature trade agreement, the Trans-Pacific Partnership (TPP), which excludes China.

Obama hopes to increase trade ties with other countries in the region as a counter to China's economic strength in the area. U.S. legislators, including many Democrats, have vowed to fight the proposed deal unless it includes measures to control the alleged currency manipulation among Asian trading partners.

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