China Devalues Yuan by 1.9%, Forex Market in Turmoil as Stocks Fall

Rupee Expected to Fall

–ABS News Service–

China devalued the Yuan as the Central Bank cut its daily reference rate by 1.9 percent. This was the yuan’s biggest one-day drop since China ended a dual-currency system in January 1994. The People’s Bank of China called the change a “one-time adjustment” and said its fixing will become more aligned with supply and demand.

It may be recalled that Chinese exports have turned negative in June after shore.

The deepest economic slowdown since 1990 is cutting the government’s grip on the financial system.

Authorities had been propping up the Yuan to deter capital outflows, protect foreign-currency borrowers and make a case for official reserve status at the International Monetary Fund. There was much talk of Yuan as reserve currency. Ban more devaluation of Yuan can be expected in the future. Thus commodity fall and currency volatility will work together to further destabilize world markets.

Global Impact

The Yuan dropped 1.8 percent to close at 6.3231 per dollar in Shanghai. It slid 2.6 percent to 6.3790 in Hong Kong’s offshore trading, the biggest discount to the onshore spot rate since 2011. The central bank allows the Shanghai rate to diverge a maximum 2 percent from its daily fixing, which was set at 6.2298.

China Reserves Fall $300bn

Exchange-rate intervention contributed to a $300 billion slide in China’s foreign-exchange reserves over the last four quarters. It also made the yuan the best performer in emerging markets, a factor behind last month’s 8.3 percent slide in exports.

The yuan’s real effective exchange rate - a measure that’s adjusted for inflation and trade with other nations - climbed 13 percent over the last four quarters and was the highest among 32 major currencies tracked by Bank for International Settlements indexes.

Market Based Exchange rates in Future

Effective immediately, market-makers who submit prices for the PBOC’s reference rate will have to consider the previous day’s closing spot rate, foreign-exchange demand and supply, as well as changes in major currency rates, the central bank said in a statement. Previous guidelines made no mention of those criteria.

The new fixing will be quoted based on the previous day’s closing, which is a real market level. The band will become the real band. This is a big step, and bolder than what the market expected.

Tuesday devaluation was a one-off adjustment and shouldn’t be interpreted as a sign that the yuan will enter a depreciation trend, PBOC chief economist Ma Jun was cited as saying in a Caixin report. The central bank said it will stabilize market expectations and ensure the new reference-rate mechanism will take effect “in an orderly manner.”

Export Growth, Capital flight

The estimate is that a 1 percent depreciation in the real effective exchange rate boosts export growth by 1 percentage point with a lag of three months. At the same time, a 1 percent drop against the dollar triggers about $40 billion in outflows.

The risk is that depreciation triggers capital flight, dealing a blow to the stability of China’s financial system. China’s leaders may be calculating that they can manage those risks with their $3.69 trillion of foreign currency reserves. The fact remains that round tripping between Mainland China and Hong Kong is one of largest illegal flows in the world. China party bosses send hot money out for laundry and recycle back to China as investments. The devaluation may mean increase in outflows and reduction in inflows. This may well spoil the party.

A tourist holds 100 yuan bank notes in Beijing, China.

Volatility

The yuan’s one-month implied volatility, a measure of swings used to price options, surged 4.8 percentage points, the most since 2004, to 6.01 percent. The gauge had fallen to a one-year low of 0.99 percent on July 24.

China July Balance of Trade Crashes

China recorded a trade surplus of $43.025bn in July of 2015. Balance of Trade reached an all-time high of $46.619bn in February of 2015. Balance of Trade in China is reported by the General Administration of Customs.

The move should push up exports and pull imports down further. This will mean further fall in commodity prices. Countries like India which have large negative trade balance with China will see increase in gap. Dollar and Euro have resin while the rupee is steady but on the weakening path. The stock market in India is falling as FIIs withdraw. This also means weakening rupee demand.

Since 1995, China has been recording consistent trade surpluses which from 2004 to 2009 has increased 10 times. In 2014 as a whole, China’s trade growth reached only 3.4 percent, below the 7.5 percent target, as exports rose at a slower pace and imports almost remained unchanged. In 2014, the biggest trade surpluses were recorded with Hong Kong, the United States, Netherlands, Vietnam and the United Kingdom. China recorded trade deficits with Taiwan, South Korea, Australia and Germany. This page provides - China Balance of Trade - actual values, historical data, forecast, chart, statistics, economic calendar and news. Content for - China Balance of Trade - was last refreshed on Wednesday, August 12, 2015.

China Trade Surplus Narrows in July

In July, exports slumped 8.3 percent year-on-year to USD 195.10 billion, compared to a 2.8 percent increase in the previous month. Imports fell by 8.1 percent year-on-year to USD 152.08 billion as a result of declining commodity prices and following a 6.1 percent drop in June. In the previous month, the country registered a USD 46.54 billion trade surplus.

Export fall was driven by coal & ignite (-34.9 percent); coke & semi coke (-2.9 percent); refined oil (-30.6 percent); clothing accessories (-6.2 percent); precious metals (-63.5 percent); steel (-2.5 percent); LCD panel (-6.6 percent) and furniture & parts (-7.2 percent).

In contrast, outbond shipments increased for: rice (+11.9 percent); crude (+531.6 percent); mineral fertilizer (+62.9 percent); ceramic products (+26.8 percent); handheld wireless (+14.5 percent) and lamps, lighting fixtures and parts (+20.6 percent).

Sales increased to India (+9.8 percent), Taiwan (+0.9 percent), the ASEAN countries (+8.0 percent), the US (7.3 percent), South Africa (+9.6 percent), Australia (+4.2 percent) and New Zealand (+11.5 percent). In contrast, exports were down to Hong Kong (-10.1 percent), Japan (-11.0 percent), South Korea (-0.8 percent), the EU countries (-4.3 percent), Russia (-36.1 percent), Brazil (-9.6 percent).

Imports shrank 14.6 percent as purchases from all of the country’s trading partners declined except Vietnam. Those from the US decreased by 7.4 percent, India (-23.0 percent), Japan (-11.1 percent), Hong Kong (-13.4 percent), the ASEAN countries (-7.1 percent), South Korea (-7.2 percent), the EU countries (-12.3 percent), Russia (-20.7 percent), South Africa (-40.2 percent), Australia (-25.7 percent) and New Zealand (-37.2 percent). In contrast, imports from Vietnam rose by 22.4 percent.