China Devalues the Yuan, Jolts Global Markets


China devalued the yuan today in a move that caught global markets by surprise. Policy makers have increased efforts to support exporters and, going forward, hope to increase the role of market pricing in Asia’s largest economy.

The Peoples’ Bank of China cut its 1-day rate by 1.9% and, thereby, triggered yuan/dollar devaluation – the biggest one-day drop since January 1994. The central bank informs only this one-time adjustment and intends to increasingly expose the yuan to market supply-and-demand.

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The announcement follows a series of lower-than-expected data releases from the Chinese manufacturing industry that culminated in decreased trade balance, as reported in this week’s CCN.LA Global Economic Outlook.

It is a good time to improve quotation of the RMB central parity to make it more consistent with the needs of market development. – PBoC

Chinese authorities had been propping up the yuan to ward off capital outflows, protect forex swap borrowers and, significantly, to create a good impression for its application for official reserve status with the International Monetary Fund.

The yuan dropped 1.8% to 6.32 USD/CNY in Shanghai. The PBoC tolerates the Shanghai rate to fluctuate a maximum of 2% from its daily fix, currently set at 6.2298.

China’s yuan devaluation shocked global markets, with the SP500, Australian dollar and commodity markets all showing reaction. Shares of many Chinese airlines dipped on concerns that USD debt costs might rise, while commodities sank, perhaps on speculation that yuan weakness will lower the purchasing power of Chinese consumers. US Treasury bonds rose on demand for US dollar investment.

Australian Dollar

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Bitcoin price pushed moderately higher in its current correction during the Asian trading session, particularly in the BTC/CNY exchanges BTC-China and Huobi, as investors fled to bitcoin as a safe haven. Holders of yuan can preserve value by purchasing bitcoin and then cashing out to yuan, later, if bitcoin were to advance; or, cashing out to US dollar if bitcoin price were to decline.

From the website of the Peoples’ Bank of China:

Why choosing the current time to improve quotation of the central parity of RMB against US dollar?

Currently, the international economic and financial conditions are very complex. The U.S. economy is recovering and markets are expecting at least one interest rate hike by the FOMC this year. As such, the U.S. 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. This complex situation is posing new challenges. As China is maintaining a relatively large trade surplus, RMB’s real effective exchange rate is relatively strong, which is not entirely consistent with market expectation. Therefore, it is a good time to improve quotation of the RMB central parity to make it more consistent with the needs of market development.

Charts from Tradingview and Bloomberg. Image by Shutterstock.