- Title: CHINA-MARKETS/YUAN China central bank devalues the yuan after poor economic data
- Date: 11th August 2015
- Summary: BEIJING, CHINA (FILE - MAY 8, 2013) (REUTERS) PEOPLE SITTING AT BANK COUNTER MAN WRITING AT COUNTER COMPUTER SCREEN PEOPLE GETTING YUAN NOTES FROM BANK
- Embargoed: 26th August 2015 13:00
- Keywords:
- Location: China
- Country: China
- Topics: General
- Reuters ID: LVA83XKTFMHULCRBICA7PUH7WN8A
- Aspect Ratio: 16:9
- Story Text: China devalued the yuan on Tuesday (August 11) after a run of poor economic data, guiding the currency to its lowest point in almost three years in a move it billed as free-market reform.
The central bank described it as a "one-off depreciation" of nearly 2 percent, based on a new way of managing the exchange rate that better reflected market forces, but economists said the timing suggested it was also aimed at helping exporters.
Data released at the weekend showed that China's exports tumbled 8.3 percent in July, hit by weaker demand from three huge trading partners - Europe, the United States and Japan.
"As a result of the strong yuan, because it is linked to the U.S. dollar, Chinese exports have become very expensive. There was a study that in 10 years, China's cost increased by 8.5 times, so China's manufacturing cost is only marginally lower than in the U.S., so this actually makes China's exports uncompetitive," said Francis Lun, CEO of GEO Securities Limited in Hong Kong.
But Lun added two percent of devaluation would have little effect on the economy.
"Frankly, two percent really doesn't mean anything. Basically if you have a 10 percent devaluation, then it might mean something, but two percent devaluation, if you analyse it, then you follow by the wages, and then the cost structure, etceteras, it has actually a minimal effect on the economy," he said.
The world's second-largest economy has slowed markedly this year and some economists believe it is expanding at much less than the official 2015 target of 7 percent. Even if it meets the target, growth will come in at a 25-year low.
China manages the exchange rate through an official midpoint, from which it can vary 2 percent each day. On Tuesday, the People's Bank of China (PBOC) said it was now basing the midpoint on market makers' quotes and the previous day's closing price.
The bank then weakened the midpoint to 6.2298 per dollar on Tuesday morning, compared with Monday (August 10)'s 6.1162 fix - the biggest-ever one-day adjustment to the midpoint.
Spot yuan ended at 6.3231 on Tuesday, its weakest close since September 2012.
Chinese people had mixed feelings about the devaluation.
"It should be a good thing for the people's lives. Exports will be easier to export, and it will be easier to sell things. So it should be a good thing," said insurance worker Wei Zhang.
"Actually, in the short term, it doesn't look like it will have any particularly obvious effects. But from the point of view of investment and wealth management, the devaluation might have some effects, but the actual effects won't be very big," said 26-year-old bank teller Zhong Zhixia.
"For the country, it might be beneficial for exports, but for me, it might be more expensive to go travel abroad, as costs will increase," said 24-year-old customer service manager Ma Ting.
In the past, the central bank set the midpoint by a formula based on a basket of currencies, but the methodology was never publicised and many believed the midpoint was frequently used as a way to bend the market to policy goals.
Under the new method, market forces would have more ability to take the yuan lower in the weeks ahead, raising the possibility of competitive currency deprecations world-wide.
However, Beijing would still have a large say in setting the new midpoints, given the heavy influence of state banks in daily trade of the yuan. - Copyright Holder: FILE REUTERS (CAN SELL)
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