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Update: China cuts yuan rate against US dollar for second day

China cut the value of the yuan against the dollar for a second consecutive day Wednesday, trimming the reference rate by 1.62 per cent, the central bank said.

[SHANGHAI] China cut the yuan's value against the dollar for the second consecutive day Wednesday, roiling global financial markets and driving expectations the currency could be set for further falls.

The daily reference rate that sets the value of the Chinese currency against the greenback was cut by 1.62 per cent to 6.3306 yuan, from 6.2298 on Tuesday, the People's Bank of China (PBoC) said in a statement on its website.

The move took the reductions to 3.5 per cent this week - the largest in more than two decades - after a surprise devaluation on Tuesday, but the central bank played down expectations it would continue to depreciate the currency.

The combined drop is the biggest since China set up its modern foreign exchange system in 1994, when it devalued the yuan by 33 per cent at a stroke.

It is also a bigger change than the 2.1 per cent rise when China unpegged the yuan, also known as the renminbi (RMB), from the dollar in 2005.

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The double move has been widely viewed as a way to boost China's exports by making them more competitive as growth slows.

Compounding concerns over the world's second-largest economy, three key indicators released on Wednesday all came in below market expectations, the latest data to show weakness.

China says it is making its exchange rate system more market-oriented, but some analysts suspect it could be the start of a longer slide in the yuan and SG Global Economics predicted the unit could depreciate by five percent over 12 months.

The cuts have already jolted global share and commodity markets and Asia-Pacific currencies have suffered as investors fret over the impact on economies closely tied to the Asian giant.

Analysts said the move could also delay an expected US hike in interest rates and even threaten a currency war as other countries come under pressure to devalue as well.

Washington has long criticised China's rigid currency regime, with officials describing the yuan as undervalued, but the US offered a mild response, saying it was too early to judge the changes.

"China has indicated that the changes announced today are another step in its move to a more market-determined exchange rate," the US Treasury said, adding: "Any reversal in reforms would be a troubling development".

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. The unit closed at 6.3870, weakening from a day before but trimming losses from earlier, and Bloomberg News reported that the central bank had intervened to buy dollars and prop it up.

The new fixing mechanism still gives officials some discretion in setting the rate, so that it will not automatically follow the market.

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.

The central bank is expected to defend the currency should it test the limits.

The PBoC also dismissed expectations of continued falls, saying in a statement the exchange rate movements were normal and "there is no base for continued depreciation".

But global markets continued their slide, with Hong Kong stocks closing down 2.38 per cent on Wednesday and Tokyo losing 1.58 per cent, while oil dropped after hitting a more than six-year low in New York.

Shanghai shares closed down 1.06 per cent as worse-than-expected economic figures also hurt sentiment.

Industrial output grew 6.0 per cent year-on-year in July, the government said, slowing from a 6.8 per cent increase in June and coming in below expectations for a 6.6 per cent rise, while retail sales and fixed asset investment also disappointed.

The yuan cuts also come as Beijing seeks 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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