News Daily Spot: China devalues yuan by 2% to boost flagging economy

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China devalues yuan by 2% to boost flagging economy

Source: TheGuardian

Surprise move follows data showing economic dip amid new fears of deepening global currency wars  

China devalued its currency in a surprise move aimed at boosting a flagging economy that has sent shockwaves through global markets and pushed European shares into retreat.

After recent data showing falling exports and a stalling manufacturing sector, the central bank said on Tuesday 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 People’s Bank of China said the centre of the yuan’s trading band was reset 1.9% lower at 6.2298 per US dollar, its weakest point against the US dollar 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.
Carmakers and luxury goods stocks were among the worst performers in European markets. China is an important export market for European luxury goods companies and carmakers, and shares in those two sectors were among the hardest hit by the yuan devaluation.
The pan-European FTSEurofirst 300 index and the euro zone’s blue-chip EuroSTOXX 50 index both declined by 0.6%. The FTSEurofirst is up around 15% since the start of 2015. 
“We have reduced our exposure to European export-led sectors, such as carmakers,” said François Savary, chief strategist at Swiss bank Reyl.

Carmaker BMW fell 2.7% in early trading while luxury goods group Swatch and LVMH both weakened by more than 3%. Burberry, the British luxury group, was one of biggest fallers in the FTSE 100, sliding 2.9% to £15.61p, while mining group BHP Billiton posted the largest decline by midday, falling 3.3% to £11.69. 
The US dollar gained against a basket of currencies, moving up 0.2% to 97.506. But the Australian dollar, often used as a liquid proxy for the Chinese currency, slid more than 1% to as low as US73.07c.
Share prices across the region were down, with the Nikkei index in Tokyo falling 0.36% and the ASX200 in Sydney down more than 0.5%. The Hang Seng, however, was up 0.72% in Hong Kong.
Oil prices slumped, with Brent futures falling as low as $50.02 a barrel, down US39c from their last close. US crude fell US42c to $44.54.
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.
A series of interest rate cuts have failed to kickstart the economy, which has also been hit by turbulence on the country’s stock markets after more than a year of unprecedented rises.
But it could trigger copycat devaluations by central banks as they attempt to maintain their own competitiveness against China.
Australia, Korea and India are among the leading Asia Pacific economies where central banks have cut interest rates to force local currencies down and boost exports hit by flagging world demand.
“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. The issue is likely to be discussed when Chinese president Xi Jinping visits the US for talks with President Barack Obama in September.
Another dimension is Beijing’s attempts to win greater status for the yuan.
It has been lobbying the International Monetary Fund to include the yuan in its basket of reserve currencies known as special drawing rights (SDR), which are used by the IMF to lend money to sovereign borrowers. The current members of the group are the US dollar, yen, euro and British pound.
The devaluation may be an attempt to make trading more open and market-based, observers said.
“I don’t think this is a reaction to the weak trade data over the weekend, I think it’s because of the SDR,” said Zhou Hao of Commerzbank in Singapore. “They need to have a market-based mechanism and they need volatility.”

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