Bazookas out as China’s yuan devaluation sparks fears of regional currency war
Beijing's sharpest yuan move in more than 20 years seen as an attempt to make exports more competitive against regional rivals
UPDATED : Wednesday, 12 August, 2015, 12:29pm
China's move to devalue the yuan came after data showed exports fell 8.3 per cent last month. Photo: AFP
With a dramatic devaluation of the yuan yesterday, Beijing brought out the bazookas in a move that might escalate a regional currency war that it had until now chosen to avoid.
The central bank shocked the markets by devaluing the yuan by the most in a day in more than 20 years, setting the daily fixing - the midpoint for the yuan's value against the US dollar - 1.87 per cent lower than Monday's level.
The instant devaluation would restore its competitiveness vis-à-vis other Asian currencies such as the Japanese yen and the Korean won that have been weakening over the past year.
"Don't think for a moment that the region's activist monetary authorities will absorb this Chinese shift placidly, with the yuan representing a large weight in each and every reference basket," Westpac economist Huw McKay said.
Signs of an imminent race to the bottom were evident yesterday as the won fell to its weakest level since June 2012, while the Taiwan dollar dropped to its lowest level in more than five years.
The Australian dollar saw its biggest single-day decline in over seven months and the Indian rupee lost the most in two months.
"Other Asian countries will see [it] as a competitive devaluation from China," JP Morgan said in a note to clients. "Currencies like the Korean won, Taiwan dollar and Singapore dollar are the most in the firing line.
"In North Asia, Taiwanese and Korean authorities are anyway on the record for preferring weakening currencies."
It also said Singapore would now also look to weaken its currency.
China is the last major economy to join a low-intensity war of currency weakening in the wake of Japan's decision to allow the yen to soften to make its exports competitive as part of efforts to end two decades of stagnation.
While its Asian neighbours have allowed their currencies to slide in varying measures, China kept the yuan steady at about 6.20 to the US dollar, largely because it has been hoping to break into an exclusive club of reserve currencies of the International Monetary Fund.
But an IMF report last week indicated that an immediate inclusion was not on the cards and that the multilateral agency would like to see greater capital market reforms, international usage and exchange rate flexibility before letting the yuan in.
Beijing's efforts to keep the yuan stable has meant the currency's real effective exchange rate, its inflation-adjusted trade-weighted average value relative to the currencies of the country's trading partners, rose 3 per cent this year and 15 per cent in the past 12 months.
The euro and the yen have each lost 18 per cent against the US dollar in the past 12 months, making their exports far more competitive.
Joining the reserve currency list could also be an incentive as a more market-oriented yuan would have a higher chance to make it to the high table, Chow said.
"In a weak global economy, it will take a lot more than a 1.9 per cent devaluation to jump-start Chinese exports," Stephen Roach, a former chairman of Morgan Stanley Asia, told Bloomberg. "That raises the distinct possibility of a new and increasingly destabilising skirmish in the ever-widening global currency war.
"The race to the bottom just became a good deal more treacherous."
The shock devaluation pushed the US dollar higher, hitting commodity prices and driving crude oil down.
With imports to become more expensive for the world's biggest user of energy, metals and grains, traders feared the devaluation could worsen the slump in the commodities market.
Gold, however, jumped to a three-week high as investors worried about the risks to the global economy.
