China launches record devaluation of yuan

In order to cope with weak exports and strong yuan, China’s central bank devalues its currency reference rate by 1.9 percent

Photo by: Reuters
Photo by: Reuters

China devalued its currency on Tuesday after a run of poor economic data, a move it billed as a free-market reform but that some suspect could be the beginning of a longer slide in the exchange rate.

The central bank set its official guidance rate down nearly 2 percent prior to market open to 6.2298 yuan per dollar - its lowest point in almost three years - from 6.1162 the previous day in what it said was a change in methodology to make it more responsive to market forces.

"Since China's trade in goods continues to post relatively large surpluses, the yuan's real effective exchange rate is still relatively strong versus various global currencies, and is deviating from market expectations," the central bank said.

"Therefore, it is necessary to further improve the yuan's midpoint pricing to meet the needs of the market."

The central bank called it a "one-off depreciation," but economists were divided over the significance of a move that appears to reverse the recent policy of maintaining a strong yuan, which has buttressed policy goals of boosting domestic consumption and outward investment.

While cutting the exchange rate will not address all the ills of China's export sector, which is hobbled by rising labour costs and quality problems, Guo Lei, economist at Founder Securities in Shanghai, said it would help relieve deflationary pressure, a far bigger economic concern.

Data released over the weekend showed China's exports tumbled 8.3 percent in July, hit by weaker demand from Europe, the United States and Japan, and producer prices are well into their fourth year of deflation.

Collapsing prices for global commodities have been blamed for the producer price deflation, putting the country at risk of repeating the deflationary cycle that has blighted Japan for decades.

Growth in China, the world's second-largest economy, has slowed markedly this year and is set to hit a 25-year low even if it meets its official 7 percent target.