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China devalues yuan in surprise move
11
Aug '15
China's central bank has devalued the yuan by almost 2 per cent - its lowest rate against the US dollar in almost three years.

The People's Bank of China (POBC) said the decision to devalue the yuan by 1.9 per cent was a "one-off depreciation" to make the exchange rate more market-oriented.

Chinese exports fell by 8.3 per cent in July, far worse than expected and the producer price index was down 5.4 per cent from a year earlier.

Analysts say the central bank's move will immediately increase the competitiveness of China's exports at a time when the country's economy is growing at its slowest rate for six years amid fears that the slowdown could worsen.

Some analysts say if other nations in the region also decide to devalue their currency in response, it could leading to so-called competitive devaluation, also known as a currency war.

The devaluation comes on the heels of a string of weak economic data from the world's second largest economy. Asian equities slipped on the news as investors weighed the implications of the surprise move and global oil price showed a downward trend.

China's Shanghai Composite Index shed 0.4 per cent to 3,912.86 while Hong Kong's Hang Seng gained 1 per cent to 24,755.51. Tokyo's Nikkei 225 lost 0.9 per cent to 20,624.96 and Sydney's S&P/ASX 200 declined 0.7 per cent to 5,470.50. Seoul's Kospi was little changed at 2,003.35. The Australian dollar sank 1.3 per cent to $0.7330. The US dollar also gained against the yen, Indian rupee, South Korean and other Asian currencies.

Despite the central bank's describing the devaluation as a 'one-off', China is likely to face criticisms, particularly from the US which has long accused China of keeping its currency artificially low by hoarding foreign reserves, instead of allowing it to move freely in foreign exchange markets.

Some analysts say that China's Asian rivals could interpret the move as a sign that Beijing is weakening its currency intentionally to boost exports by undercutting competitors.

The POBC's move comes amid speculation that China is preparing to widen the trading band for the currency from the current two percent range.

China has long kept tight control of the yuan value on concerns over financial volatility and losing its policy control.

Yet it is also under pressure to reform its currency policy after pushing for the inclusion of the yuan in the IMF's "special drawing rights" (SDR) basket, which the organization uses to value reserve assets. The basket currently includes the dollar, euro, British pound and Japanese yen.

Inclusion in the IMF's currency basket would lend significant prestige to the yuan, which is being used more and more frequently to execute international transactions and payments. (SH)

Fibre2Fashion News Desk – India

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