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 The central bank set its official guidance rate down nearly 2
percent to 6.2298 yuan per dollar - its lowest point in almost three
years - in what it said was a change in methodology to make it more
responsive to market forces.
It was the biggest one-day fall since a massive devaluation in 1994
when China aligned its official and market rates.
"Since China's trade in goods continues to post relatively large
surpluses, the yuan's real effective exchange rate is still
relatively strong versus various global currencies, and is deviating
from market expectations," the central bank said.
"Therefore, it is necessary to further improve the yuan's midpoint
pricing to meet the needs of the market."
The People's Bank of China (PBOC) called it a "one-off
depreciation", but economists disagreed over the significance of a
move that reversed a previous strong-yuan policy that aimed to boost
domestic consumption and outward investment.
"For a long time, I gave the PBOC credit for holding the line on the
renminbi (yuan) and recognizing that while it might be tempting to
try to shore up the old-growth model by devaluing the currency, that
really was a dead end," said fund manager Patrick Chovanec of
U.S.-based Silvercrest Asset Management.
He said a strong yuan was needed to force China toward consumption
and away from low-end manufacturing. "What the world needs from
China is not more supply; what it needs is demand."
The devaluation followed weekend data that showed China's exports
tumbled 8.3 percent in July, hit by weaker demand from Europe, the
United States and Japan, and that producer prices were well into
their fourth year of deflation.
The move hurt the Australian and New Zealand dollars and the
Korean won, fanning talk of a round of currency devaluations from
other major exporters. But some of Asia's most interventionist
central banks appeared to be holding their nerve on currency policy.
"I don’t think the move would trigger a global currency war," a
Japanese policymaker said.
Economists pointed out that until Tuesday, China had held the yuan
firm while its neighbors had debased their currencies.
FEAR OF DEFLATION
While a weaker yuan will not cure all the ills of China's exporters,
which suffer from rising labor costs and quality problems, it would
help relieve deflationary pressure, a far bigger economic concern in
the view of some economists.
Falling commodity prices have been blamed for producer price
deflation, putting China at risk of repeating the deflationary cycle
that blighted Japan for decades.
Growth in China, the world's second-largest economy, has slowed
markedly this year and is set to hit a 25-year low even if it meets
its official 7 percent target.
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The devaluation hit shares in Asia and Europe. Chinese airline
stocks also fell, given the impact higher fuel prices would have on
their bottom line, though exporter stocks rose.
Some said the move was also to blame for a fall in futures contracts
tracking the S&P 500 index , given the potential hit to U.S. exports
to China.
MONEY MANAGEMENT
Spot yuan ended at 6.3231 on Tuesday, its weakest close since
September 2012. The spot yuan is allowed to rise or fall by 2
percent from a midpoint that is set each day.
In the past, the central bank set the midpoint by a formula based on
a basket of currencies, but the methodology was never publicized and
many believed the midpoint was frequently used as a way to bend the
market to policy goals.
Under the new method, investors moving assets out of yuan could take
the rate lower in the weeks ahead.
The yuan had been locked in an extremely narrow intraday range since
March, varying only 0.3 percent.
Some economists said the devaluation was also designed to support
Beijing's push for the yuan to be included in a basket of reserve
currencies known as Special Drawing Rights (SDR), which are used by
the International Monetary Fund to lend money to sovereign
borrowers.
"The PBOC aims to move the renminbi to a freer floating and
accessible currency, prerequisites for it to be given the IMF’s
reserve stamp of approval, and will see it move in a wider band,"
said Angus Campbell, analyst at FXpro.
The IMF proposed in a report this month to put off any move to add
the yuan to its benchmark currency basket until after September
2016, and it gave mixed reviews of Beijing's progress in making key
financial reforms to its currency market.
(Additional reporting by Samuel Shen and Kazunori Takada in SHANGHAI
and Vidya Ranganathan in SINGAPORE; Editing by Mark Bendeich, Will
Waterman and Ian Geoghegan)
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