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China cuts Yuan rate against US dollar for second day

Latest Update: August 12, 2015 | 170 Views

SHANGHAI: China cut the value of the yuan against the dollar for a second consecutive day Wednesday, trimming the reference rate by 1.62 percent and sending a new shockwave through financial markets.

The daily fix that sets the value of the Chinese currency against the greenback was lowered to 6.3306 yuan, from 6.2298 the previous day, the People s Bank of China (PBoC) said in a statement on its website.

But the bank played down expectations it would continue to depreciate the currency, after it devalued the yuan by nearly two percent on Tuesday.

That devaluation the biggest since 2005 when China unpegged the yuan, also known as the renminbi (RMB) from the dollar raised worries over the health of the world s second-largest economy.

The action was widely viewed as way to help boost exports by making them more competitive as economic growth slows, although China s central bank described it as a one-off move to reform its exchange rate system.

The move jolted global share and commodity markets, with jitters spreading on Wednesday, as investors fretted about the health of the world s second-largest economy.

Chinese authorities maintain strict controls on the currency, but they have made repeated pledges to move to a more market-oriented system.

SG Global Economics said in a research report that depreciation “should help the struggling Chinese economy”.

“Although the PBoC referred to the move as a one-off, (we) now see the bias for further depreciation,” it said.

Previously, Chinese authorities based the fixing on a poll of market-makers, but the PBoC said Tuesday they will now also take into account the previous day s close, foreign exchange supply and demand and the rates of major currencies.

Wednesday’s fix was even lower than Tuesday s close of 6.3232 yuan to the dollar.

Asian shares fell Wednesday, with Hong Kong, Shanghai and Tokyo all losing more than one percent, while oil continued its slide after hitting a more than six-year low in New York.

The PBoC sought to calm markets, saying movements in the yuan exchange rate were normal and dismissing expectations of continued falls.

“From the international and domestic economic and financial situation, currently there is no base for continued depreciation of the RMB exchange rate,” the bank said in a statement.

China allows the yuan to trade only within a two percent range on either side of the daily reference rate, although the State Council, or cabinet, has signalled it intends to widen the band.

“In the long-term, the band will widen along with the marketisation (of the yuan),” Liu Dongmin, director of international finance research office at the Chinese Academy of Social Sciences, told AFP.

China is also seeking to have the yuan included in the International Monetary Fund s basket of “special drawing rights” (SDR) reserve currencies.

The IMF has said more work was required on the proposal, but a spokesman welcomed Tuesday’s changes, saying they should give market forces “a greater role in determining the exchange rate”.

“Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets,” the spokesman added.

“The exact impact will depend on how the new mechanism is implemented in practice.”



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