The yuan’s exchange rate drops nearly 2% against the dollar. The move follows poor foreign trade data and several months of steady gains.
The People’s Bank of China devalued its currency, the yuan, on Tuesday after its exchange rate had remained unchanged against the U.S. dollar for months and the country’s exports had suffered as a result. The institution set the daily reference rate at 6.2298 yuan per dollar, a depreciation of 1.86% compared to Monday’s figure. After this change, the yuan’s value against the dollar has fallen to a three-year low.
In a statement, the monetary regulator described the move as an “exceptional depreciation” aimed at allowing the exchange rate to “better reflect market forces.” China manages the exchange rate of its currency through a daily central parity rate set by the Central Bank, which is allowed to fluctuate within a maximum 2% band each day.
“China maintains a relatively large trade surplus, and the renminbi’s exchange rate is relatively strong compared to other global currencies. This is not entirely consistent with market expectations. Therefore, it is a good time to improve its quotation system,” the regulatory body stated.
The devaluation, which Bloomberg reports is the largest in two decades, follows a sustained drop in foreign sales from the Asian giant, one of the main engines of the country’s economic growth in recent decades. So far this year, the value of foreign trade has fallen by 7.3% compared to the same period last year, a figure far below the Government’s targets, which expected a 6% growth.
While the value of the Chinese currency has been pegged to the dollar, the currencies of its main competitors have depreciated significantly. The yuan has strengthened by more than 21% against the Japanese yen and over 11% against the South Korean won in the past year, causing Chinese products to lose competitiveness. The exchange rate of the currency of its main trading partner, the euro, has also depreciated by more than 17% against the Chinese currency.
Despite the progressive slowdown of its economy, Chinese authorities have in recent months advocated for sustaining the yuan’s value to prevent capital flight and to present the currency as a stable asset to boost its international use. In fact, one of Beijing’s major goals is for the International Monetary Fund to include the Chinese currency in the basket that determines the value of Special Drawing Rights, which would officially recognize the yuan as a global reserve asset and promote its use worldwide. However, the IMF is pushing for the Chinese currency to become fully convertible in international markets. In this regard, the Central Bank stated that the depreciation is part of the measures aimed at allowing “the market to play a more prominent role” in determining the yuan’s exchange rate in the future.
XAVIER FONTDEGLÒRIA Beijing 11 AUG 2015 – 09:56 CEST
