WHAT IS DEVALUATION OF CHINESE YUAN
The Chinese yuan (Renminbi) is the currency of China, with currency code CNY and currency symbol ¥. In early 2014, the CNY was the seventh most traded currency in the world
Beijing uses what it calls a "managed float." It allows the yuan's exchange rate to fluctuate within a band 2 percent above or below a point set by the People's Bank of China based on the previous day's trading. That allows the exchange rate to rise or fall in response to supply and demand but prevents wide swings that might hurt traders.
This is different from other major currencies such as the U.S. dollar and the euro, which are freely traded. But most other countries also regulate exchange rates based on an "anchor currency" such as the dollar to prevent abrupt swings that might hurt their economies. In China's case, the United States and other major trading partners complain Beijing suppresses the yuan's value, giving its exporters an unfair price advantage and hurting foreign competitors.
The country’s currency basket has been sliding at an annual pace of 12pc since the start of the year. This has picked up sharply since the Brexit vote, suggesting that the People’s Bank (PBOC) may be taking advantage of the distraction to push through a sharper devaluation.
“This makes a mockery of the PBOC’s suggestion that its policy is to keep the currency’s value stable,” said Mark Williams, chief China economist at Capital Economics. “Markets will not take PBOC policy statements at face value in the future.”
WHY DID CHINA DEVALUE?
The central bank said it took action because the yuan has been rising in value when market forces indicated it should have fallen. The yuan has been pushed up because its exchange rate is heavily influenced by the U.S. dollar, which also has risen. At the same time, currencies of other developing countries have fallen. This has hurt Chinese exporters by making their goods more expensive abroad. China's exports plunged by an unexpectedly wide margin of 8.3 percent in July 2016.
WILL DEVALUATION RAISE TENSIONS WITH THE U.S.?
Tuesday's change presents a dilemma for U.S. policymakers who have often accused China of manipulating the yuan for a trade advantage. A weaker yuan will make Chinese exports more competitive and might trigger complaints from U.S. manufacturers. But the central bank said it is trying to make the exchange-rate system more market-oriented , a step Washington has been pressing Beijing to take.
WILL DEVALUATION HELP CHINA'S EXPORTERS?
Tuesday's decline of less than 1.1 percent against the U.S. dollar is modest compared with the swings in other major currencies. But every bit of relief from price pressures helps Chinese exporters, whose profit margins are paper-thin. The central bank said Tuesday's change was a one-time event. But its promise to give market forces a bigger role in setting exchange rates in future raised the possibility of further declines, which would relieve still more price pressure on exporters.