China Stock Turmoil 2015

China’s central bank devalues the yuan 2 per cent – biggest drop since 1994 - in wake of stock market crash

PUBLISHED : Tuesday, 11 August, 2015, 10:20am
UPDATED : Wednesday, 12 August, 2015, 12:30pm

China’s central bank devalued the yuan on Tuesday, setting the daily mid point yuan trading price a record 1.86 per cent weaker at 6.2298 to the US dollar in the clearest sign yet the government may let the currency soften after worsening economic data and a stuttering stock market.

Foreign exchange markets reacted immediately with the onshore yuan trading 1.41 per cent weaker at 6.2970 against the greenback.

“The international economic and financial conditions are very complex. The US dollar is strengthening, while the Euro and Japanese Yen are weakening. Emerging market and commodities currencies are facing downward pressure, and we are seeing increasing volatilities in international capital flow,” a spokesman for China’s central bank, the People’s Bank of China, told the media Tuesday morning.

The yuan had “deviated the from market rate to a large extent and with a larger duration, which, to some extent, has undermined the market benchmark status,” the spokesman said.

The onshore yuan trading band is tightly controlled. The People’s Bank of China set a daily mid point around which the currency can trade up or down 2 per cent each day.

This latest development follows an announcement two weeks ago that the PBOC would widen the yuan daily trading band, without elaborating.

Before Tuesday, the government had resisted calls from economists to let the currency sink lower as a way to help boost parts of the economy, even as exports crumbled and the country’s stock market shrank by 30 per cent. Weekend data revealed an 8.3 per cent year on year decline in China’s exports for July.

“I am not surprised at all. The Chinese government will let the renminbi weaken gradually. It will keep doing this policy easing, including cutting interest rates” to help the economy, said William Mo, Tung Shing Securities vice president.

With the US Federal Reserve poised to hike interest rates possibly as soon as next month, the US dollar will only get stronger, said Mo, increasing the pressure on China to give the yuan more freedom to trade lower.

Analysts had previously said the government wanted the currency stable ahead of possible inclusion into the International Monetary Fund’s reserve currency basket. People might also try and switch yuan into foreign currencies if the yuan was to start weakening, setting off capital outflows.

The PBOC spokesman also said there would be further “market-orientation” and that the central bank was now soliciting quotations from market makers before setting the mid price - a first for the PBOC said analysts.